Consumer confidence picks up, but "real test" to arrive in coming year

(Alliance News) - A bigger-than-expected improvement in UK consumer confidence was welcome, if unexpected, news on Friday, but market analysts warn against expecting the recovery to continue in the coming months.

GfK's long-running Consumer Confidence Index improved five points in August, with all measures reversing the drop seen in July, although it remains firmly in negative territory at minus 25. It had been expected to rise by only one point to minus 29, according to FXStreet-cited consensus.

Confidence in the general economic situation for the next 12 months increased by three points to minus 30 – 30 points better than last August – against a backdrop of falling core inflation, higher interest rates and rising average weekly earnings, GfK said.

The forecast for personal finances over the coming year increased four points to minus three – 28 points higher than this time last year.

Meanwhile, the major purchase index – a measure of confidence in buying big-ticket items rose eight points to minus 24, 14 points higher than this month last year.

The improved mood "makes sense", according to Pantheon Macroeconomics, which pointed to the fall in energy bills in July and the drop in mortgage rates in recent weeks.

However, there are reasons to think it won't last long.

"While the sun may have been shining on moods when this survey was taken, there has now been a slew of data that suggests the UK is slipping into recession," considered Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.

Only on Wednesday, the UK flash purchasing managers' index came in at a 31-month low of 47.9 for the composite reading. The decline seen in manufacturing is now extending to the services sector, with both sectors' PMIs indicating contraction.

"Things like easing inflation and record pay growth are potentially masking the reality for households," Lund-Yates continued.

Average pay growth began to level out with the rate of inflation last month, with wage inflation continuing to accelerate while consumer price rises cool slightly.

"The real test will arrive in the coming year as more people roll off fixed mortgages and are forced onto a much higher rate," she added.

"At that point, a higher squeeze on incomes and savings stashes will come into force and confidence could wane once more. This all adds up to an uncertain picture for the UK's businesses and economy."

By Elizabeth Winter, Alliance News senior markets reporter

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