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News: Consumer confidence plummets

Wed, 05 Sep 07

The Nationwide Consumer Confidence Index fell back in August reflecting the impact of five interest rate rises over the past year...

The main Index fell by two points, but it was not alone. All indices fell in August, the first time since December 2006 that all four measures of confidence showed a downturn in the same month.

The Present Situation Index (how consumers feel about the current economic and employment situation) fell two points to 96, while the Expectations Index (how consumers feel about the economic and employment situation in six months time) fell four points suggesting

that consumers are more downbeat about the future.

The Spending Index (consumers’ willingness to spend) saw the largest drop in confidence in August with the index decreasing seven points to 79 – just two points above than the all time low of 77 seen in December 2006.

Turmoil in financial markets

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.

Fionnuala Earley, Nationwide’s Chief Economist, said: “The fall in each of the consumer confidence indices is not surprising given the five increases in interest rates in just a year. It now seems clears that consumers are taking this to heart in their spending intentions.

Recent events such as the floods and the turmoil in the financial markets may also be having something of an impact on their sentiment. But one bit of good news for consumers is that the unexpectedly large fall in inflation, along with financial market unrest, means that it is now much less likely that the MPC will feel a further hike in interest rates is necessary.”

Looking forward, consumer confidence deteriorates

Confidence about the future fell in August. The most significant factor behind this was a big increase in the proportion of consumers who thought there would be fewer jobs available in six months time. Almost one in three people are negative about the number of jobs available in the future (compared to 26% in July).

This is consistent with an increase in the number of people who thought that the economy would be in worse shape in six month’s time. Interestingly, consumers were still happy about their future household income. In spite of the expectation of a worsening labour market, a smaller proportion thought their income would be lower in six months time.

Confidence about spending falls

The Spending Index was the only index to see a large fall in August; falling seven points to 79 – slightly above the all time low of 77 seen in December 2006. Sentiment about buying a major purchase, such as a house or car fell most. Just 15% of consumers think now is a good time to purchase such a major item compared with 21% this time last year. But feelings about whether it’s a good time to buy household items such as a fridge or washing machine also fell to a new low*.

House price expectations moderate further

Peoples’ expectations of house price growth increased slightly in August, but the underlying trend is still moderating. Consumers expect house prices to rise 3.8% over the coming six months, increasing from 2.7% in July, but the three month moving average has weakened to 3.1% from 3.4% in July.

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