Bright sparks signalling a turnaround in the Irish grocery economy appear to have been short-lived, as the Irish government announced wide-ranging austerity measures due to the country’s massive economic deficit.

According to Kantar Worldpanel data, for the quarter ended 31 October, the Irish grocery market recorded its highest growth since February 2009, following last month’s announcement that the sector had started to grow again for the first time in 16 months.

However, this growth is unlikely to continue after the Irish government announced on Wednesday (24 November) a series of sweeping plans to cut public spending in order to get the deficit down to 35% of GDP by 2014. Government cuts, higher taxes, increased unemployment and public sector job cuts likely to impact consumer confidence, while higher VAT levels and a lower minimum wage will have a more marked operational impact on the retail sector.

However, despite the cuts, the retail sector in Ireland is not all doom and gloom, with suggestions from some corners saying that the planned cuts at least give consumers a degree of certainty, which has been lacking as the cuts have loomed.

Paul Kelly, the director of Food and Drink Industry Ireland, told just-food that consumer confidence has “obviously been battered quite a lot”.

However, Kelly said that “uncertainty has a negative effect on consumer confidence” and that the announcement has given consumers a “lot more clarity on how things are going to go for the next few years”.

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He added: “I don’t think anybody is saying things are wonderful by any means, this is an austere period. But the more detail people have, the more certainty they have, the more decisions they can make and the more opportunities that consumer sentiment will improve.”

The chief economist of KBC Bank in Ireland, Austin Hughes, largely agreed with Kelly, although emphasised the negative forces that would be in play. “The critical question for consumer sentiment is that there will be significantly more pain in terms of cuts in social welfare and increases in taxation over the next while. Against that however, one assumes there will be some easing in uncertainty, at least now people understand the scale of the pain. So how these two contrasting influences play our remains to be seen,” he said.

The key question, Hughes added, is “whether or not consumers have fully anticipated the degree of pain they’ll take”.

Nevertheless, Kelly was buoyed by the growth forecasts outlined in the Irish government’s austerity package.

“We’ll take encouragement from the fact that they’ve planned a growth strategy for the economy next year. It’s [the government] expecting the economy to stabilise this year and grow next year at a rate of 2.75% between then and 2014, so there’s growth that will underpin the economy. That’s a positive thing for the food sector. We’re already starting to see it in the food and drink sector, where our exports in the industry are up for the first eight months of the year, over 8% compared with the same period last year.”

However, Kelly highlighted concerns around the increased VAT rates, which are set to grow to 22% in 2013, from 21% currently, with a further hike to 23% in 2014. “I know it’s at the far end of the plan, but I know it [the VAT increase] would work against any recovery in consumer spending.”

Kelly is also concerned about increases in excise duties, with the Irish government working to raise over EUR100m in extra excise duties. “In the main that’s going to come from alcohol, tobacco and petrol, I’d imagine. So there would be concern that any increase in excise would stimulate an increase in cross-border shopping again and obviously that would be disappointing for the domestic sector.”

The Kantar Worldpanel statistics released earlier this week revealed a decrease in cross-border shopping into Northern Ireland, with customers in the Republic enjoying the lower prices introduced by some domestic stores over the quarter.

UK retailers Asda and Sainsbury’s, which have no stores in the Republic, had benefited from the growth of Irish shoppers crossing north into Northern Ireland. But, according to Kantar, their combined share of the Republic’s grocery market fell from 2.5% to 2% in the quarter ended 31 October.

Speaking about the drop in cross-border shopping, Kelly said: “It has decreased significantly over the last year. Time will tell in the coming weeks in the lead up to the Christmas period but we’ve had significant deflation down here across the food sector, and we’ve also seen the VAT levels rise again up north, so the combination of those should have a significant impact in reducing the number of shoppers heading up and shopping north of the border.”

While Ireland certainly faces a tough few years ahead, the bright sparks of growth may be fading, but have not gone out entirely yet.