Sentiment on the wane globally

Carefree August summer holidays may be a thing of the past. In 2007 and 2008 the credit crunch and stock market slumps forced millions of people to focus on their finances rather than their holidays.

In 2011 a similar pattern is occurring – this time fuelled by intense media negativity on economic news creating a downward spiral of sentiment that threatens to push the developed world into recession and lower growth in the developing world

Global consumer confidence as measured by Neilson in Q2 2011 fell to its lowest level in 6 quarters – down to 89 from 92.

Improving consumer sentiment in Europe and the UK in the early summer has slumped dramatically in July/August. In the EU, the European Commission flash estimate of August consumer confidence fell 5 points to –17 in August from –12 in July and a year ago and the lowest level since September 2009. In the euro-area confidence is down 6 points to –17 compared to –11 in July and a year ago.

Germany, which has seen a surge in consumer confidence in the past year, up from 0 to +8, is wilting under the strain of being Europe’s banker. The widely followed German IFO survey of business confidence suffered its largest month-on-month fall in August since November 2008, when the world economy was rocked by the collapse of the world’s financial institutions.

Nationwide UK consumer confidence down 5 points in August

UK consumer confidence dropped sharply in both GfK and Nationwide measures in July and is likely to have fallen further in August to near record lows, pointing to a double dip recession. The former fell 5 points to –30, while the Nationwide measure is down 5 points to 48. Both measures are the lowest since April.

Big declines in the expectations (down 9 points) and spending indices (down 7 points) pushed the Nationwide headline index lower. Fewer people expect many/ few jobs to be available and to have higher income in 6 months time. As a result spending confidence has weakened both for major purchases (e.g a house or car) and household goods.

US consumer confidence at recession levels

In the US the July measure of consumer confidence of Reuters/ Thomson / University of Michigan tumbled in July to its lowest level since the economy was in recession, down 8 points to 63.7 and below 67.8 a year ago. Expectations fell sharply, down from 64.8 to 56.0 (62.3, July 2010). Consumer fragility is increasingly evident at the first signs of renewed adversity. As a result of all the bad news, only 1 in 10 consumers now expect inflation-adjusted gains during the year ahead with many forced to reduce planned discretionary spending.

The Neilson Q2 measure of US consumer confidence is down 5 points to 78, 2 points lower than in H1 2009 at the height of the global recession.

Debt weighing down sentiment

US consumer sentiment has a big impact on global growth with the debate over spending and taxes set to be at the centre of next year’s Presidential election. Such debate is likely to be acrimonious and create a very uncertain outlook.

As in the UK, US consumers are increasingly aware of the grave consequences of excessive personal debt and the burden that such debt can have on financial well-being and subsequently on health. In Europe, consumers are paying the bills for excessive government debt. French consumers are the latest to be paying higher taxes in the future as the French government strives to maintain its AAA credit rating.

Sentiment highest in India and Asia-Pacific

With the western world increasingly downbeat about prospects, much hope is placed on India and the Asia-Pacific region to drive growth forward. India topped the Q2 Neilson Global Consumer Confidence Barometer, followed by The Philippines and Indonesia. 7 of the top 10 countries were in the Asia-Pacific region. In India confidence slipped 5 points on the quarter with growing concerns about inflation and the squeeze on household incomes in the face of rising interest rates.

In China confidence fell by 3 points on the quarter to 105, the first decline in a year and comes amid growing worries over inflation and the impact on disposable incomes. In July Chinese inflation reached a 37-month high of 6.5%. Chinese growth projections continue to be high relative to the West, although a decline in export volumes are expected that will reduce growth.

Both in China and India high levels of consumer confidence will be key measures to monitor. Higher levels of discretionary consumer spend on western goods will help to offset the slowdown in domestic markets for European and US companies.

Increasing jobs key to recovery

Increasing jobs in the West will be crucial to any recovery. Many companies to date have preferred to raise market share through brand spending rather than through capital spending. WPP in their latest report believes some $2 trillion is sitting on relatively unleveraged balance sheets resulting in a relatively jobless recovery.

With slumping stock markets, a constrained and fragile international banking sector and political uncertainty in many countries such business investment is unlikely in the coming months.

The back-to-school feeling this autumn is set to be a very uncertain one.

For details of the JGFR consumer confidence and financial activity barometers and of our consultancy work call 0208 944 7510 / 07740 027968 or email j.gilbert@jgfr.co.uk