Sunday, July 02, 2023
Everything's gloomy, so why is consumer confidence rising?
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. Not to be reproduced without permission.

On the principle that no news is good news, which I write with some trepidation, there has not been that much bad economic news over the past few days. We have not had another bad inflation figure or a rise in interest rates, though that tells us as much about the calendar of meetings and statistical releases as anything else. True, with have had some worrying news on the privatized water industry, and I relished the reassurance that Thames Water has “strong liquidity” and those fears persists.

So, more generally, do the storm clouds over the economy as a result of high and rising mortgage rates and stubborn inflation. And, with more strikes due in the National Health Service and on the railways, people have reason to wonder whether things are getting worse rather than better.

It is all the more surprising, then, that according to a widely followed measure, produced by GfK since the 1970s, consumer confidence last month was up for its fifth month is a row, and is at its highest for 17 months. One of the striking features of GfK’s consumer confidence barometer, published a few days ago, was that, despite the mortgage gloom swirling around, people’s confidence in their own personal financial situation over the next 12 months stood at just -1.

“This is a whisker away from pushing into positive territory, something we have not seen since December 2021, and it’s also the third consecutive monthly increase – all of which is good news for the future,” said Joe Staton of GfK. “Consumers are showing remarkable resilience in the face of inflation that is currently refusing to yield.”

I have long followed this consumer confidence index which, strikingly, fell to an all-time low last winter when the cost-of-living crisis was at its most intense. For people looking for a return to normality after the pandemic, the inflation shock had come as a “one thing after another” disappointment.

Despite being a follower, I was surprised by the latest readings. Did people not know what was about to hit them? However, John Gilbert, who runs his own JGFR consultancy, and follows the GfK barometer even more closely than I do, even developing his own “feel-good” index from a subset of the data, says something genuine is happening.

As he puts it: “June’s GfK consumer confidence data highlights the major challenge for policy makers. Despite headlines predicting great consumer pain ahead in the wake of interest rate rises there seems a disconnect with the current state of household finances, at their strongest since February 2022, and with savings confidence at a 21-month high.”

It is not just the consumer confidence index telling this story. Next, the retailer, provided an unscheduled trading update recently, in which it said that trading in the seven weeks to June 19 had been “materially better” than in its previous guidance.

As well as better weather, it offered an economic explanation. “In an inflationary environment, annual salary increases deliver a significant uplift in real household income at the time they are awarded, it said. “For example, during April annual inflation was running at 8.7 per cent and monthly inflation was 1.2 per cent; if an individual received a pay rise of 5 per cent, then their real income would have risen by 3.8 per cent in that month. We do not think it is a coincidence that sales stepped forward so markedly at a time of year when many organisations make their annual pay awards.”

It is an interesting explanation, though Next also suggested that the penny would drop over time as people’s pay rises were eroded by inflation. On this, what matters is how rapidly inflation falls from present levels.

There is another reason why consumer confidence is not obeying the script, however, and it goes to the heart of the problems the Bank of England is having. It is supported by the Bank’s own statistics.

This is that, even though savers and the government would like the banks to be more generous in the rates they are offering, the pass-through from higher official interest rates to higher savings rates is happening. Savers are getting higher rates on their deposits then they have seen for well over a decade.

Mortgage borrowers, on the other hand, are not all experiencing higher rates at once, but only when their fixed terms come to an end. This is the nub of the problem of the longer lags in monetary policy, which the Bank was slow to spot. Most owner-occupiers, moreover, are mortgage free.

Not only are savers benefiting, but there are more savings to benefit. One of the features of the pandemic was a big increase in involuntary saving. It was involuntary because people could not spend o the things they normally spend on; foreign holiday, entertainment, eating out, sporting events, commuting, even new cars.

The Bank’s figures, released on Thursday, show that household deposits – savings are some £340 billion or 23 per cent higher than they were on the eve of the pandemic. Some of this increase would have occurred anyway, but £200 billion or so of it falls into the involuntary category. People have savings they did not expect to have and are getting interest on them.

Not only that, but the ability to draw down those savings is allowing some to manage their way through the squeeze. Household deposits fell by £4.6 billion in May, the latest figures. There has also been a small fall in recent months in the total of mortgage debt outstanding.

These are early days, but the recovery in consumer confidence is explicable, though the question of whether it can survive the mortgage pain as it comes through is a valid one.

One interesting additional point is that the rise in consumer confidence does not appear to be doing anything for the government’s poll ratings. The Tories remain roughly 20 points behind Labour and, according to YouGov’s latest tracker, only 14 per cent of people approve of the government’s record, while 66 per cent disapprove. Turning that around remains a formidable task.