Improving UK consumer confidence shows easing inflation being noticed

(Alliance News) - Consumer confidence in the UK has reached its highest level in two years, according to a GfK survey, with analysts saying prospects for interest rate cuts and lower inflation are beginning to "trickle through" to the average consumer.

GfK's consumer confidence index rose by three points to minus 19 this month – its best headline score since January 2022, as optimism for the coming 12 months strengthens.

Confidence in personal finances gained two points and now stands at zero, ending 24 consecutive months of negative scores and "the best single indicator for how the nation's households feel about their income and expenditure", GfK said.

"Despite the cost-of-living crisis still impacting many households across the UK, consumers appear to be encouraged by the positive news about falling inflation," said Joe Staton, client strategy director at GfK.

"On balance, while there is national and global turmoil, the consumer confidence index has started 2024 on a positive note. Let's see if this optimism continues."

Expectations for the general economic situation over the next year have increased by four points to minus 21 – 33 points higher than last January.

Meanwhile, the major purchase index, a measure of confidence in buying big ticket items, is up three points to minus 20 – 20 points higher than a year ago.

"So while there's still clearly further room for things to improve, the average consumer's concerns are reducing as hopes for interest rate cuts and lower inflation trickle through," said Hargreaves Lansdown analyst Sophie Lund-Yates.

"Retailers who have faced a tough Christmas will be hoping these better moods translate into improved spending."

The FTSE 100 was lifted by the positive UK economic indicator. London's blue-chip index was up 1.1% on Friday morning.

Pantheon Macroeconomics said the ongoing revival in consumer confidence "suggests households will spend more in real terms this year", after prioritising "saving more and borrowing less" in 2023.

"The aggregate index rose to its highest level since December 2021, driven by improvements in the year-ahead outlook for both personal finances, the balance for which rose to just over a two-year high of 0, from -2, and the broader economy, the balance for which increased to a two-and-a-half-year high of -21, from -25," said Pantheon Macroeconomics analyst Gabriella Dickens.

"Sentiment should continue to improve as year-over-year growth in average weekly earnings continues to outstrip [consumer price] inflation, which likely will fall slightly below the 2% target as soon as April and remain low throughout the rest of the year. Fiscal policy will also boost real household disposable income; the [Office for Budget Responsibility] estimates that current tax and benefit policies will boost year-over-year growth in [real household disposable income] by 0.6% in 2024/25, and new tax cuts will be announced in the budget."

Pantheon Macroeconomics predicted that the "drag" on disposable income from mortgage refinancing will continue to fade as new mortgage rates decline further and the number of people with maturing mortgages edges down.

As a result, it expects real household disposable income to rise at an average quarterly rate of 0.5% in 2024, the fastest pace since 2017.

"Granted, GfK's survey suggests the saving ratio will remain higher than usual. Indeed, the net balance of households that think now is a good time to save remained unchanged at positive 27, well above its average since 1982, positive 12. Nonetheless, the saving ratio was probably nearly 4pp above its 2015-to-19 average in Q4, and we doubt that a further pivot towards financial caution is likely," said Pantheon Macroeconomics' Dickens.

"ONS survey data indicate that the proportion of households without a small savings buffer fell sharply in the second half of 2023, returning to the lows coming out of the Covid-19 pandemic. Accordingly, people who have rebuilt their rainy-day fund might now save a smaller fraction of their income this year. All told, then, we expect households' real expenditure also to grow at an average quarter-to-quarter rate of 0.5% in 2024."

Following the survey release, Lloyds Bank said investors will now look ahead to the Bank of England's policy decision on Thursday next week, which it expects to be a hold on interest rates.

Last month, the BoE kept its bank rate at a 15-year high of 5.25%. It is the third successive hold, following one in September, which ended a streak of 14 consecutive hikes since December 2021, and one in November. The BoE had rapidly increased bank rate from a Covid-19-induced low of 0.10%.

The BoE hiked rates in a bid to cool inflation. Inflation's recent peak was 11.1% annually in October 2022, which the Office of National Statistics estimated to be the highest since 1981.

On Wednesday last week, data from the ONS showed UK consumer prices unexpectedly heated up in December.

The ONS said the consumer price index rose by 4.0% annually in December, the pace of inflation notching up from a 3.9% increase in November. The reading came in hotter than market expectations, with consensus having been for price inflation to cool to 3.8%, according to FXstreet.

By Greg Rosenvinge, Alliance News senior reporter

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