NEWS RELEASE

London May 13^th 2008

Slumping consumer confidence points to recession

The two April UK consumer confidence indices point to a growing likelihood of one or more quarters of falling GDP for the first time in some 16 years.

Both measures of the mood of the consumer fell to multi –year lows. Confidence in the long-running GfK NOP survey fell 5 points to –24, its lowest since November 2002 following the exit of the UK from the Exchange Rate Mechanism (ERM).

Worries over the general economic situation in the past 12 months as a result of stories of recession, the credit crunch, housing market falls, and future petrol and food price increases have now been added to by a steep fall in worries over personal finances. April’s cut in interest rates did little to lift spirits.

Nationwide Index down to lowest in 4 –year history

A similar story is told in last week’s Nationwide Consumer Confidence survey that fell to its lowest score in its relatively short 4-year history – down to 70 in April from 77 in March. All three of the sub-indices fell.

The biggest shift is in consumer sentiment around the current economic situation, down 9 points to a record low of 65. Only 17% of people think the current economic situation is good – less than half of the level that thought the economy is good was in good shape before the credit crunch and Northern Rock issues arose.

Consumer sentiment about the economic and employment situation in 6 months time fell for the first time in 2008 to a low of 74 from 79. Almost half (45%) of consumers believe that the economy will be worse in 6 months time, compared to 26% who thought this at the same time last year. This suggests longer lasting effects of the credit crunch.

Consumers tighten purse strings

Beset by general economic and personal financial worries it’s not surprising that consumers are less confident about spending, particularly on major purchases. Both spending measures in the GfK NOP survey fell to multi –year lows; the spending climate measure, included in the headline index, fell 3 points to –24, its lowest since November 1990.

60% of consumers believe now is a bad time to make a major purchase such as a house or a car compared with around 51% 6 months ago. Consumers are also more reluctant to purchase household goods – 12% believe now is a bad time to buy – twice as many as 6 months ago. The feel-good effect of rising house prices no longer provides support – consumers anticipate house prices will fall by –1.7% in the next 6 months.

….with an impact on consumer spending and business activity

Consumer spending is set to weaken considerably in 2008 and extend into 2009. Retailers are finding trading conditions very challenging and increasingly the squeeze on spending will be reflected in a slowdown in the key services sector.

In the latest CIPS/NTC Purchasing Managers Survey service sector growth is at its lowest in over 5 years as demand and sentiment suffer from the credit crunch fallout. The seasonally adjusted headline measure of 50.4 is down from 52.1 in March and just above the key 50 level that signifies rising activity. The growth of activity is at its lowest since March 2003.

With the economic environment deteriorating and margin pressure intensifying, business confidence (as reflected in the CIPS/NTC Business Expectations Index) sank to its lowest since October 2001. The lowest degree of confidence is found in hotels and restaurants, where respondents commented on the worsening economic climate and customers reducing their spend accordingly.

…and little summer economic sunshine in prospect

Nationwide’s Confidence Barometer showed a reading of ‘gloomy’ with ‘stormy’ the next level (65) to breach. With only small cuts in interest rates in prospect and financial institutions becoming ever-more cautious on lending, both consumer, and more crucially business confidence (from a jobs perspective), is set to get worse in the coming months.

…resulting in political speculation and shadows of 1978/9

People will increasingly resent the enveloping economic crisis and vote accordingly. Increasingly commentators are comparing the current situation to the final years of the Labour government of 1978-9.

Then, growing frustration with the Government’s economic performance, and a fall in living standards resulted in the ‘Winter of Discontent’ and the end of Labour’s general dominance of politics which had been the case for much of the 1960s and 1970s. A resurgent Tory party under Mrs Thatcher subsequently dominated the 1980s. Given the current state of the polls and parties it seems likely history may repeat itself.

To get your own insight into the mood of the consumer subscribe to the monthly UK Consumer Confidence Monitor. Details info@jgfr.co,uk or ring 0208 944 7510