Worsening consumer confidence threatens economic growth and Tory election result
By Oliver Haill
Date: Thursday 27 Apr 2017
(ShareCast News) - British consumer confidence weakened over the last month even as business confidence strengthened, as both sides eyed rising inflation but softening economic growth.
The European Commission's economic sentiment index (ESI) for the UK inched up to 110.5 in April from 110.2 in March.
This was the ESI's highest level since August 2015, as an improvement in services sector confidence offset a gloomier mood in the manufacturing, retail and construction sectors.
Meanwhile the consumer confidence indicator, a seasonally adjusted version of the GfK index that is scheduled to be released on Friday fell to -5.0 in April from -4.3 in March and February.
Consumer confidence therefore stood well below last September's post Brexit vote peak level of -1.7, with the +7 level seen a month before the 2015 general election a distant memory.
A marked softening of consumer spending is seen as contributing to a drop in gross domestic product growth in the first quarter of 2017, with the market expecting data on Friday to show UK GDP growth slowed to 0.4% quarter-on-quarter in the first quarter from 0.7% quarter-on-quarter in the fourth quarter of 2016.
Business confidence and prices rising
The ESI survey signalled that corporate confidence is continuing to recover as firms get used to Brexit risks, said economist Samuel Tombs at Pantheon Macroeconomics.
"Firms, however, still are planning sharp price rises that threaten to choke off demand," he said, noting that the net balance of retailers planning to increase prices over the next three months remained high at 61.1 in April, only down slightly from 62.9 in March, with a higher-than-usual proportion of services, construction and industrial firms also plan to raise prices over the next three months.
This points to a pickup in core goods inflation to about 3% later this year, from 1.2% in March, Tombs said, which households are picking up on and becoming more wary about the economic outlook.
Consumer wariness has stemmed as purchasing power has been diluted as inflation marches higher amid muted wage growth.
Household angst about the economic situation and outlook is significantly higher than for most of 2016, noted Howard Archer at IHS Markit.
"This is significant as the economy's resilience through the second half of 2016 after June's Brexit vote was largely built on consumers keeping on spending," he said.
Worryingly for UK growth prospects, the perfect storm for consumers of rising inflation and muted earnings growth is highly likely deterioration further over the coming months, Archer added, with the danger that slowing economic growth will intensify consumer gloom and put a further dampener on spending.
"It is also very possible that consumers will face a weakening labour market before long."
Election stinger?
What's more, Tombs suggested the low level of consumer confidence had implications for June's general election.
With the indicator now comfortably below the +7 level seen a month before the 2015 general election, this implied Theresa May's Conservatives "will attain a much smaller majority in the forthcoming general election than implied by current opinion polls".
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