Economic sentiment indicator

12. Jul 2024
Economic optimism slips further

The Economic Sentiment Indicator (ESI) provides a snapshot of economic optimism by combining survey responses from consumers and businesses. Consumers contribute 20% to the overall index. The remaining 80% comes from four key industrial sectors, each weighted according to their economic contribution: primary sector (40%), services (30%), retail (5%) and construction (5%). 

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This weighting system aims to capture the combined sentiment of households (consumers) and businesses across the major economic engines. The ESI currently stands at -5, well below the long-term average of 16. The table below reveals various confidence trends, with details for each six-monthly survey since June 2022.

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Households slightly more optimistic about the year ahead

The confidence indicator for households, or consumers, is 4, indicating slightly higher confidence in the overall economic outlook than in the past two years. Households now also appear slightly more optimistic about their private finances 12 months from now.

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A quarter struggle to make ends meet

As in the previous six-monthly survey, about a quarter of households say they only just manage to make ends meet. About 60% say they are saving money. Despite significant consumer price hikes in the past three years, borrowing does not appear to have increased.

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Will consumer spending increase?

Consumer patterns affect the retail sector, as households purchase a large portion of the goods offered by this sector. More consumers are reporting that now is the right time for major purchases such as furniture and electronic items. More consumers also plan to spend large amounts on home improvements, compared with the previous survey from January 2024.

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 Consumers rarely believe there is an ideal time to buy a house or a car. The same applies to car purchases, although these figures are on a slight increase.

Survey questions and graphs are available on the consumer page.

Growing confidence in the retail trade sector

Brighter days may be ahead for the retail trade sector, with the retail confidence indicator increasing from -27 to 4. Consumer price growth is slower than it has been in the past three years. The retail sector anticipates increased sales in the coming year. Retailers report better sales in the past year compared with the previous two surveys. As the primary supplier to domestic consumers, the retail trade sector may benefit from households' growing optimism. 

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Retailers do not, however, expect an increased demand for staff in the next 12 months.

Survey questions and graphs are available on the retail trade page.

Construction confidence fading

Despite remaining above the long-term average of 23, construction confidence dipped from 51 to 31 in the latest survey. This sentiment is reflected in firms' hiring plans, with expectations for significantly lower staffing needs in the coming year. Production limitations have also become more prevalent. While 40% of companies reported no such limitations in the previous survey, that figure has now shrunk to 14%. Financial constraints are another concern, affecting 28% of firms.

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Construction firms report a decrease in orders, but secured employment measured in the number of months remains steady. The firms anticipate price increases for their work in the coming year.

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The construction sector exhibits high volatility in its confidence indicators, reflecting its sensitivity to broader economic trends. 

Survey questions and graphs are available on the construction page.

Pessimism prevails in primary sector and other industries

The confidence indicator for the primary sector and other industries plunged from -19 to -33. driven by a decline in orders and rising inventories. Firms also hold a more pessimistic view of production for the coming year. The anticipated drop in production is believed to be linked to the decline in orders and the rising inventories. Reduced activity in the primary sector and other industries is reflected in anticipated staff cuts for the coming year. Staff shortages, a persistent obstacle to growth across many Faroese industries, remain a challenge.

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The Faroese primary sector, heavily reliant on exports, is feeling the pinch of declining international demand. Orders from abroad have fallen noticeably, and companies report a declining international market share.

No improvement in service industry optimism

Despite high confidence levels in recent years, the service industry has seen a reversal of fortune in the past year and a half. The indicator has dropped to 18, with surveyed companies reporting disappointing turnovers. However, some optimism remains. Many service firms anticipate increased demand in the coming year, reflected in expectations for higher staffing needs.

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Survey questions and graphs are available on the primary-sectors page and services page.