Consumer confidence remains subdued in spite of rate cut

The Nationwide Consumer Confidence Index dropped one point to 85 in December – the lowest level since February 2007. In spite of the quarter point cut in rates in December, ongoing economic uncertainty and the impact of higher food and petrol prices seem to be continuing to affect consumers’ confidence.

Consumers’ feelings about the current economic and employment situation, reflected in the Present Situation Index, deteriorated in December. The index fell three points from 91 to 88 due to more negative views about the economy. The Expectations Index (how consumers feel about the economic and employment situation and income in six month’s time) remained stable (83), but the underlying data shows a significant weakening in confidence in the economy and future income expectations. However, consumers still seem to feel optimistic about their jobs, both at the moment and in six months time and it is this which is supporting expectations in particular. The Spending Index (consumers’ willingness to spend) picked up by a respectable five points in December, but at 68 remains well below the average for the year of 82.

Fionnuala Earley, Nationwide’s chief economist, said: “Another weak month for Consumer Confidence is not surprising given current economic conditions. Continued uncertainty about the future path of the economy along with a weakening housing market was bound to affect consumer sentiment. Early signs of strong consumer presence at the seasonal sales is encouraging, but the need to persuade shoppers through heavy discounting could itself be seen as a signal of underlying caution. Further rate cuts expected in the first quarter of 2008 may help to improve matters, but it is likely to be a few months before consumer confidence recovers to levels seen earlier this year.”

Optimism in the labour market but less contentment with economic outlook

Consumers appear to be largely optimistic about the employment situation with only 24% believing that there will be fewer jobs available in six months time. This compares to 36% who felt this way this time last year. This would seem to explain the continued buoyancy in expectations of future household income – 88% believe their income will be the same or higher in six months time. Having said that, consumers are less happy about the state of the economy. 42% believe that the economic situation will be worse in six months time than it is today.

Little New Year cheer for retailers

Retailers will be disappointed to hear that, despite an overall increase in the Spending Index in December, consumers are still reluctant to splash out on major purchases. Over half (58%) of those questioned think now is a bad time to make a major purchase – 10% more than the same time last year (48%). Some of this could be seasonal as consumers wait for January sales bargains, but there does also seem to have been a shift in sentiment.

House price expectations continue to fall

Expectations of house price growth continued to fall in December. Consumers expect house prices to increase by just 0.7% over the next six months, down from 1.2% in November. This moderation in expectation is not unexpected and will partly reflect recent reports of a downturn in the housing market.