Sunday, February 01, 2015
Consumers are buoyed by the 'feel-better' factor
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

A month into the year and questions about the recovery are already being asked. Growth slowed at the end of last year, with the smallest quarterly rise in gross domestic product for a year.

Are these the “red warning lights” David Cameron warned about coming into sharp focus? Is the recovery past its sweet spot? And what happened to that boost from lower oil prices that we have all been talking about?

The answer is to the last question is that it is still there. As Professor Peter Spencer, chief economic adviser to the EY Item Club puts it, if you put money into the hands of the British consumer, you can safely assume that he or she will spend it.

This is not just conjecture. Figures on Friday showed that the main measure of consumer confidence in Britain, produced by GfK-NOP, rose strikingly in January, by five points.

Every measure of the index rose, with people’s perception of their financial situation over both the past 12 months and the next 12 months each up by four points, their perception of the general economic situation over the past 12 months up by 5 points and over the next 12 months by four. Their willingness to make major purchases rose by six points on the month.

Even more dramatic are the comparisons with a year ago. People’s assessment of how the economy has been doing is up 15 points, while perceptions of their own financial position have shown a 10-point improvement. As Michael Saunders, an economist at Citi, puts it: “The ‘feel-better’ factor is back.”

There is a similar message in the Markit household financial index. Though launched only in 2009, the depths of the crisis, its January readings were the best in six years.

Nor is this just a theoretical “feel better” factor. The CBI, in its latest distributive trades survey, said retailers enjoyed “robust” sales growth in January, even after an exuberant Christmas. Not only did 39% more retailers say sales were up compared with January last year than reported falls, but they were also optimistic about prospects for this month. “Consumers have a bit more money in their pockets,” said Rain Newton-Smith, the CBI’s director of economics. “We expect to see this translate into strong sales growth in the months ahead.”

This, it should be repeated, came after a very strong festive season. Retail sales volumes rose 2.3% in the final quarter of last year, their strongest for 12 years.

Why is it happening? None of this should be too much of a surprise. The most visible price in the economy is for petrol, displayed in big letters outside every service station. Petrol prices have come down from an average of 131p a litre to an average of 106p.

To update a calculation I did in December, the fall is equivalent to a substantial tax cut. Had the chancellor achieved a 25p a litre cut in the price of petrol through duty reductions, it would have cost roughly £13bn. Add cuts in diesel and household gas tariffs, and the indirect effects of cheaper energy on other prices, and it is huge.

A report last April by the Treasury and HM Revenue & Customs, entitled “Analysis of the dynamic effects of fuel duty reductions”, suggested lower fuel prices have lasting growth-boosting effects, for both firms and households. It is not the only boost.

Employment growth continues to be strong, though its pace has slowed a little in recent months. Nevertheless, it is up more than half a million in the past year, overwhelmingly for full-time roles.

Nor is the usual dampener for consumers — higher interest rates — looming as a worry. Andy Haldane, the Bank of England’s chief economist, visiting north Wales, suggested in an interview with the Daily Post that the Bank is in no hurry to raise rates, as noted here last week, but that when they do rise they may do so at no more than half a percentage point a year.

That is his personal view rather than the collective view of the Bank’s monetary policy committee but, if correct, it suggests higher interest rates are not going to get in the way of growth for several years.

The big reason why people are more optimistic, and converting that optimism into higher spending, is that the cost-of-living crisis is over. The Labour party’s narrative is that this is a miserable recovery accompanied by falling living standards. The evidence from the surveys is that this kind of thing will increasingly fall onto deaf ears. Combine falling unemployment with low inflation and rising living standards and you have a recipe for optimism.

All this is good news for the government, though the Tories are inching rather than racing up in the polls and the Liberal Democrats have yet to emerge from the political doldrums.

There are those who say, despite George Osborne and Cameron’s claim this is all due to their “long-term economic plan”, it has nothing to do with it. The coalition is a lucky beneficiary of events outside its control. There is some truth in that, but those who live by the cost-of-living sword must also die by it.

Much of the squeeze on real wages in recent years came from price changes in global energy and commodities outside the government’s control. You cannot blame them for one and expect them not to claim credit for the other.

What about those GDP figures, which showed that while 2014 was the best for growth since 2007, the economy expanded by “only” 0.5% in the fourth quarter?
Apart from the fact that not so long ago 0.5% growth would have been regarded as a cause for celebration, the usual health warning applies. Part of the reason for weaker growth was a drop in the volatile construction sector. If that figure does not get revised I am prepared to eat a very large hat.

Similarly, energy production was hit by the mild weather in the first half of the winter. That is not a meaningful loss of momentum.

Meanwhile, the figures also showed that Britain’s recovery compared with where the economy was before the crisis now ranks behind only Canada and America in the G7. Not so long ago, people bemoaned the fact that we were not doing as well as Germany and France. No longer.

Of course, we want stronger growth in exports, though here we are reliant on the European Central Bank’s quantitative easing injecting some life into the eurozone economy and Greek contagion not spreading. And of course we want businesses to respond to rising domestic demand by investing more.

But if consumers are more optimistic, more than half the battle is won. Their spending accounts for 62% of GDP. There was not much of a growth pause at the end of 2014, and it should not last.