UK Consumer Confidence

There are few economic factors as influential as consumer confidence. On the hand it is somewhat elusive based on the attitudes and perceptions of householders. But, consumer confidence has the power to make or break economic policy.

UK Consumer Confidence

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. The graphs certainly show a strong relationship between economic performance and consumer expectations.

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 falling, 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.

If consumer confidence is very high, consumer spending is likely to rise despite higher rates.

Self-Fulfilling Expectations

In theory, it is possible for consumers to think 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.

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.

Outlook for Consumer Confidence in 2010

Predictions for economic growth is grim. But, news of the end of the recession and stabilisation in house prices has helped improve general expectations. This will certainly help the economy weather tax rises and the low wage growth.


Perma Link | By: T Pettinger | Monday, January 25, 2010
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