For the first time in six months, household confidence in the UK economy has dipped. This shift marks a notable change in sentiment towards the economic outlook.
Despite improvements in personal financial optimism, broader concerns about the economy’s future have led to a decrease in overall confidence.
Overall Economic Sentiment
The long-running GfK index, which dates back to the 1970s, remained unchanged at -13. This figure, while slightly above the long-term average of -18, fell short of City analysts’ expectations. The decline in optimism reflects mounting concerns about the economic outlook for the next year, with GfK’s economic optimism index falling by 4 points to -15, marking its first decline since February.
Past Economic Performance
Households are noticeably less assured about the economy’s performance over the past 12 months. This period has been marked by a recession, contributing to the overall feeling of economic uncertainty.
Key economic indicators and the backdrop of previous financial hardships have had a lasting impact on consumer sentiment.
Personal Financial Optimism
Interestingly, amidst the broader economic pessimism, households have shown increased optimism about their personal finances for the upcoming year.
The GfK budget index, which measures personal financial expectations, rose by 3 points to +6. This improvement is largely attributed to a recent reduction in mortgage interest rates, providing some financial relief to borrowers.
Impact of Bank of England’s Decision
The Bank of England’s decision on August 1 to cut the base rate from 5.25 per cent to 5 per cent has played a pivotal role. This marks the first reduction since March 2020 and has been welcomed by borrowers. Expectations of further cuts this year have also contributed to the positive shift in personal financial outlook.
The reduction in base rates has had a broader impact on financial stability, extending beyond immediate borrower relief.
Savings Behaviour Amid Economic Uncertainty
The survey highlighted a significant increase in the savings index, which climbed 6 points to 33. This suggests that consumers are choosing to save rather than spend, capitalising on higher interest rates amid economic uncertainty.
The inclination to save is partly driven by the desire to build financial buffers in times of economic unpredictability. This trend could have long-term implications for consumer spending and economic growth.
Higher savings rates, while beneficial for individual financial health, could result in reduced consumer spending, further challenging economic recovery.
Historical Comparison of Consumer Confidence
Consumer confidence remains higher than in previous years, having recovered from its record low of -49 in September 2022.
This sharp decline in consumer confidence in September 2022 was closely linked to the aftermath of the controversial mini-budget presented by Liz Truss and Kwasi Kwarteng.
The financial market turmoil triggered by the mini-budget significantly impacted mortgage rates, an effect still evident in consumer confidence metrics today.
Expert Insights
Joe Staton, GfK’s client strategy director, emphasised that despite mixed results, the overall confidence figures are considerably more positive compared to a year or two ago. “The broader economic outlook remains precarious,” he noted.
The dip in household confidence in the UK economy highlights the complex interplay between broader economic concerns and individual financial optimism.
While the positive shift in personal financial outlook offers some respite, the overall economic sentiment underscores the challenges ahead. Maintaining a balanced view of these factors will be crucial for navigating the economic landscape.