Getty ImagesA sharp fall in a long-standing gauge of consumers’ feelings about their finances and the economy raised concerns that the government’s warning that the budget would be “painful” had shaken confidence.
Since the end of August, the GfK consumer confidence barometer has fallen further into negative territory.
The index has been recovering after years of the coronavirus pandemic, rising prices and higher interest rates that dampened prospects for many.
GfK said the latest move did not bring “encouraging news” for the new British government, while some economists linked the drop to Labour’s pessimistic rhetoric on the budget.
Sir Keir Starmer said the Budget on October 30 would be “painful”, with some taxes rising and spending cuts.
Plans to means-test the winter fuel payment have been announced, meaning more than nine million pensioners will no longer be eligible for the maximum £300 payment this winter.
The new government has been keen to highlight the economic legacy inherited from the previous Conservative administration, but some business leaders, such as Richard Walker, the Labour-backing Iceland business owner, have warned the government to be wary of “prophecies of doom”.
The Institute of Directors (IoD) business group said talk of higher taxes and increased employment rights had “undermined confidence in the UK business environment”.
Market research firm GfK said there had been a “significant revision” in consumers’ views on the overall economic situation and the likelihood of making big purchases, with double-digit declines.
‘Pessimism and depression’
According to the GfK survey, people’s views on their own personal financial situation in the future also turned negative again, falling by 9 percentage points to -3.
Other consumer confidence indicators also declined, and overall the main index fell 7 points to -20.
Nick Glynne, boss of Buy It Direct Group, which sells big-ticket home appliances and furniture online, claimed that traffic to its website had fallen by 9% since “Keir Starmer started his doom and gloom rhetoric”.
“There is almost a perfect correspondence between when the government starts to announce potentially bad news in the budget and demand falls,” he told the BBC’s Today programme.
He said there was a “feeling that the Budget would take money out of people’s pockets by raising taxes”, but added there were other factors affecting business, including customers worried about mortgage costs.
“We’re hoping that the government is overdoing it a little bit, or overdoing it to manage expectations, and hopefully by November we’ll benefit from a continued decline in mortgage rates,” Green said.
The drop in consumer confidence was unexpected because it came after the Bank of England cut interest rates to 5% in August, which could ease pressure on some households. On Thursday, the central bank flagged further cuts to borrowing costs, albeit “gradually.”
Inflation, a measure of how quickly prices are rising, also fell sharply, remaining at 2.2% in August, just above the central bank’s 2% target.
Neil Bellamy, director of consumer insights at GfK, said: “Despite stable inflation and the prospect of further cuts to the base interest rate, this is not all good news for the new UK government.”
He said consumers were “nervously” awaiting the upcoming Budget on October 30 following the scrapping of winter fuel payments and warnings of “further tough decisions” on taxes, spending and benefits.
Asked last week whether “pessimism was overdone”, Chancellor Rachel Reeves told the BBC: “The latest business surveys continue to show high levels of confidence in the UK economy as this government has restored stability.”
She also spoke about how she now wants to “unleash” the country’s huge potential.
The British government claims that the public finances face a £22 billion “black hole” this year, but about £9 billion of the shortfall stems from Reeves’ decision to award a public sector pay deal above the rate of inflation.
Justin King, former chief executive of supermarket Sainsbury’s and current chairman of energy supplier Ovo Energy, said it was similar to when a company turned around, “the first thing you need to do is actually get people in place”.
“I suspect they are also engaging in some expectation management,” he told the BBC’s Today programme. “They are hoping the Budget is not as bad as people think it is, so you might as well get all the bad news out in advance so people don’t think it’s as bad as it seems.”
The latest data showed that the UK economy failed to grow in July, which is a blow to the new government which has made boosting the economy one of its top priorities.
The Bank of England also cut its economic growth forecast for July-September to 0.3% from 0.4%.
Bank of England Governor Andrew Bailey said on Thursday he believed underlying confidence was rising but consumers “want to see evidence that momentum is continuing”.
He also noted that rising incomes from surging inflation led to a “huge increase in savings” last year – an increase that outpaced consumer spending.
Although the latest figures from the Office for National Statistics showed retail sales rose 1% in August compared with July as warmer weather and end-of-season discounts attracted shoppers, the growth was only 0.7%.
The Treasury said the government had been “honest about the state of the public finances we have inherited” but added that it was “taking action to rebuild Britain based on our underlying strengths, including our world-leading renewable energy and services sectors”.
The chancellor and prime minister are expected to offer a more hopeful and optimistic economic message at next week’s Labour Party conference and at a key investment summit in mid-October.
But it is clear that this government has not reneged on the fact that the budget will include tax increases, welfare cuts and reductions in spending in government departments.
