Fall in spending confidence dents rosy start to 2010

Despite a downward stutter last month, the Nationwide Consumer Confidence Index recorded a three point increase in January to 73, almost double the level of confidence recorded during the same period last year (39%). While the Present Situation and Expectations indices both ticked up to 23 and 107 respectively, confidence in spending fell away sharply during the month and dropped to 96 in January from 108 in December.

Expectations about house prices rose slightly in January, with consumers expecting the value of their home to increase by 1.1% over the next six months, compared to 1.0% in December.

Martin Gahbauer, Nationwide's chief economist, said: "The dip in confidence last month was a timely reminder that consumers remain cautious about the speed at which the UK will recover from what has been a longer and deeper recession than many expected. Positive signs from the manufacturing sector and labour market may have helped boost confidence during January, but confidence is likely to remain fragile for some months to come. Heavy discounting on the high street and government driven incentives such as lower VAT, the car scrappage scheme and the stamp duty holiday combined to keep the Spending Index buoyant throughout much of 2009. The removal of these initiatives may now be causing consumers to reconsider parting with their cash at a time of year when we would normally expect to see high levels of spending confidence."

Confidence in the present situation gradually improves

After a turbulent 12 months for the Present Situation Index, consumers are once again starting to feel more confident about the current economic and employment situation. Nearly a quarter (22%) of those questioned believe there are many or some jobs available and 69% believe the current economic situation to be bad, compared to 73% in December and 82% in January last year.

Positive sentiment towards the future

Views about the future economic and employment situation were largely upbeat during January with 36% believing the economic situation would be better in six months time, compared to 34% last month and just 17% in January 2009. The number of those believing there will be more jobs in the future increased by four percentage points in January to 29% - the highest percentage since June 2008. Half of those questioned (50%) believe there will be few jobs available in six months time - the figure appears to be large, but when compared to 53% in December and 67% during the same period last year, it shows that sentiment is gradually improving.

Spending confidence not as robust as in previous years

The figures this month appear to show that movements in spending confidence were relatively small, with the percentage of those believing now is a good time to make a major purchase falling from 35% in December to 32% in January. Confidence towards purchasing household goods even ticked up, with 45% believing now is a good time to buy compared to 42% in the previous month.

The twelve point drop in the Spending Index is largely due to seasonal adjustment, which identifies and accounts for how yearly and seasonal trends can affect consumer confidence. In previous years we have typically seen spending confidence in January increase significantly. So, while consumers continue to show a willingness to spend, they do not appear to be as confident as they have been when compared to this time of year historically. The removal of various government stimulus measures including lower VAT may have had an impact, but we may also be seeing consumers preferring to pay off debt rather than make large purchases following the festive period.