UK consumer confidence resilient in face of credit crunch

The Nationwide Consumer Confidence Index ticked down one point in October to 98 but seems largely untouched by recent events. Consumer confidence is now at the same level as a year ago having recovered from significantly weaker sentiment during the year.

The Spending Index (consumers’ willingness to spend) continued its downward trend in October. The index fell by eight points, its largest fall since March 2007. This fall takes the index to 77, its lowest level since December 2006.

This seems consistent with a fall in the Present Situation Index (how consumers feel about the current economic and employment situation). This fell three points to 99, reflecting consumers increased gloom about the current situation and may be the reason why they feel less willing to spend. However, the Expectations Index (how consumers feel about the economic and employment situation in six months time) was more upbeat and was the only index to rise in October.

The UK Nationwide Consumer Confidence Index uses a similar methodology to that of the US Conference Board, the most highly regarded Consumer Confidence Index in the US, widely acknowledged as a key US economic indicator. Nationwide’s monthly survey is compiled in partnership with TNS.

The future seems brighter

Brighter expectations are once again driven by confidence in the labour market and the economy. The survey revealed that the number of people who are negative about the future employment situation fell to its lowest level since February 2005. Just 2 in 10 consumers (21%, down from 23% in September) think there will be few jobs available in six months. However, consumers are not expecting the labour market to take off. The survey shows that much of the change in sentiment is to a neutral, rather than a rising position. Nevertheless, while consumers remain fairly secure about the employment situation, it is unlikely that overall consumer confidence will go into freefall.

Fionnuala Earley, Nationwide’s chief economist, said: “Consumer’s confidence seems, so far, to have remained resilient in the face of the recent highly visible upset in the financial markets. While there is a continued reluctance to spend, the credit crunch has not had a sharp effect on overall consumer sentiment with consumers still very happy about the prospects in the labour market and for household finances. Looking forward, it is likely that we will see some weakening in confidence as the economy begins to slow, although some of the effect may be offset by the cuts in the base rate we expect in 2008.”

Confidence about spending on major items drops

The number of people who are confident about buying a major item such as a house or a car has seen a noticeable fall. Just 14% of consumers are confident that now is a good time to make such a major purchase – down from an all time high of 33% seen in November 2005. Some of this may be due to softer expectations for house prices, but it may also have been affected by perceptions about the availability and cost of credit resulting from the credit crunch.

House price expectations slump

Expectations of house price growth slumped to more realistic levels in October. Consumers now expect house prices to increase by just 1.9% over the coming six months – down from 3.2% in September. This decline is not unexpected as the three month average has been cooling since May and reported housing market data has largely been showing softening trends.