Spending cuts spooking confidence

 

Spending cuts to be announced this week are set to push confidence to recession levels, as cuts in real take home pay and job losses will dominate the economic news in the run up to Christmas and into next winter.

 

Nationwide’s September Consumer Confidence Index (NCCI) highlights the rise in consumer pessimism with a 5-point drop in the headline index – down 5 points to 56, its lowest level since April 2009. Steep falls in the Expectations Index – down 8 points to 76 – its lowest since March 2009, and in the Spending Index – down 12 points to 88, its lowest since August 2009, reflect the difficult times consumers see ahead.

 

At the same time inflation continues to show its resilience, despite the expectation of the Bank of England that in the next 2 years consumer price inflation will fall back to 2%. Price rise expectations among consumers in the recent GfK NOP confidence survey highlight a widening gap of between what policy makers and consumers expect.

 

Currently consumers believe prices have risen an average of 9% over the past year (12% among the lowest income group) and expect them to rise 7% in the next 12 months (10% among low earners) – far above the ‘official’ level of expected CPI –falling back towards 2%.

 

Next January’s rise in VAT from 17.5% to 20% will give retailers a tough pricing challenge, particularly when spending confidence on major purchases is slumping.

 

In the latest Nationwide survey a net balance of  -18% consumers believe it is a good time to make a major purchase such as a house or car, down from –4% in March and +2% a year ago. Spending confidence on household goods is higher, although weaker than a year ago. A net balance of +23% believe it to be a good time to buy, little changed on March but down from +28% a year ago.

 

More people expect their household income to be higher in 6 months time  -17% in September compared to 12% in August and 18% a year ago - but more also expect their household income to be lower (16%, compared to 15% in August). The net balance (+1%) is at its highest since April but down from +8% a year ago and will be a big constraint on consumer spending, especially when consumers are reluctant to borrow.

 

Increasingly the outlook for the economy will revolve around business investment and whether this will be expanded to create the jobs needed to change the prevailing mood of gloom. However growing numbers of workers do not expect new job creation – 58% of workers expect there to be not many / few jobs available in 6 months time, compared to 48% in March and 50% a year ago according to the Nationwide survey. The GfK September CCB found 76% of adults expect unemployment to rise in the next 12 months, compared to 65% in March and unchanged on a year ago.

 

To subscribe to the regular tracking reports on sentiment and financial activity – across a range of demographic groups – and/ or to discuss in more detail our work in this area please contact:  John Gilbert 44 (0) 208 944 7510 / 07740 027968 or email j.gilbert@jgfr.co.uk

 

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