Latest figures for UK consumer confidence show an improvement towards the end of 2012, but overall the picture is still negative with an index score of -21 for UK consumer confidence.
source: GFK Consumer Confidence Barometer | 30 November 2012 – (click to enlarge)
Consumer confidence is measured through surveys about people’s economic outlook. Unsurprisingly after the 2008 Credit crunch, consumer confidence plunged to a record low of – 38. The partial economic recovery of 2010 saw an improvement in confidence, before a second double dip led to a decline in confidence during 2011 and 2012.
There is a sharp correlation between consumer confidence and economic growth.
Source: ONS – National income accounts
What Explains the improvement in November figure for consumer confidence?
- Economic Recovery in Q3 of 2012 were the first signs of strong growth for quite a while. It may prove to be temporary, but confidence is very much reflected in what is happening now.
- Slight fall in unemployment. Unemployment is slowly decreasing which helps to boost confidence.
- The confidence index is still – 21, so overall people are still pessimistic.
- Adapting to lower expectations. It is possible that due to the length of the recession and persistent squeeze on real incomes, we are becoming more used to ‘difficult circumstances’.
- As with any economic data, you shouldn’t read too much into one off monthly figures.
Long Term UK consumer confidence
UK Consumer Confidence since 1992.
(We are a pessimistic lot. Confidence was barely positive – even in the long period of economic expansion of the late 1990s and early 2000s.)
How Consumer Confidence is Measured
Consumer confidence is based on a sample survey with a range of people asked questions about the state of the economy and their expectations for the future. These questions include:
- Appraisal of current economic conditions
- Expectations regarding economic conditions six months hence
- Appraisal of the current employment conditions
- Expectations regarding employment conditions six months hence
- Expectations regarding their total family income six months hence
Respondents can answer positive, negative or neutral. Consumer Confidence Index CCI is an aggregate of all 5 answers.
What Influences Consumer Confidence?
Expectations are largely based on the current economic situation and reported news. News of job losses and falling house prices are amongst the key factors which influence consumer confidence.
Importance of Consumer Confidence
Consumer confidence can radically affect the effectiveness of economic policy. Suppose the Bank of England cut interest rates from 5% to 0.5% – in theory this gives consumers more disposable income to spend. However, if consumer confidence is very low, they are much more likely to save this extra income. Therefore, the interest rate cut may be ineffective in boosting spending. This is exactly what happened in 2009. Certainly other factors kept spending low (banks unwilling to lend, banks not passing the base rate onto consumer). But, low consumer confidence was one key factor.
On the other hand, if consumer confidence is very high, consumer spending is likely to rise despite higher rates.
In theory, it is possible for consumers to ‘talk themselves into a recession’. If people expect a recession, confidence drops, spending drops, creating a negative multiplier effect of lower growth and higher unemployment. This in turn causes more falls in consumer spending.
In reality, consumers don’t expect a recession without some good reason. Recessions have more causes than an unexplained fall in confidence. However, the drop in confidence strengthens the underlying negative factors.
Consumer Confidence and Saving Rates
There is an inverse relationship between saving rates and consumer confidence. When confidence falls the immediate reaction is for households to increase savings and reduce borrowing. This makes sense if you fear unemployment, it is not the time to engage on a borrowing spree. Since the summer of 2008, the UK savings rate has risen as confidence as fallen.