Are there turbulent times ahead for consumer confidence?
I think it’s safe to say that 2016 has been one of the most interesting years since the GfK Consumer Confidence Barometer (CCB) started back in 1974.
The monthly survey we carry out for the European Commission among UK consumers started the year in a resiliently bullish mood, increasing two points to +4 in January.
But we quickly saw concerns about the EU Referendum. In February, the Overall Index Score dropped four points back to zero.
Our Brexit Special
We conducted a Brexit Special survey immediately after June 23rd to measure the post-referendum mood accurately. We announced on July 8th that the Overall Index Score had tumbled eight points to -9. The last time there was a sharper drop than this was back in December 1994. We definitely heard alarm bells.
It was only another three weeks from July 8th until we could capture a better picture of the consumer mood in the month after the EU Referendum. Our end-of-July announcement revealed the true month-on-month fall was sharper at 11 points (down to -12). This was the biggest monthly drop for more than 26 years (March 1990).
But the real surprise was yet to come because consumer confidence quickly began to creep back up again. By the end of September, the Overall Index Score was back to -1, a rebound to pre-Brexit levels that we had seen in June. In October, it slipped two points to -3.
So where next? The consumer mood is likely to be more volatile as we approach Christmas. The weakness of sterling will remain a big issue and this has a range of implications. For businesses transacting overseas it’s good news as it makes them suddenly more competitive. But for UK consumers planning their 2017 holidays, they are likely to encounter higher prices. This will be especially true when they calculate how much spending money they will need overseas. So that will dampen the mood. We will also witness consumers being swayed by the headlines around the triggering of Article 50, the hard Brexit vs soft Brexit debate and the role of Parliament in all this. Markets will react and that will create volatility – and consumers worry when that happens.
The weakness of sterling has its silver lining though. If you are living outside the UK and you are considering a dash across the pond or the English Channel for some Christmas shopping, then that has become much more attractive. Any major currency will go further and good hotels will feel less expensive. So perhaps Christmas will see us welcoming many more tourists? If so, retailers large or small are certain to benefit. Anybody working in retail or tourism will be feeling more festive than usual – and for sound business reasons.
How will we react to inflation?
Consumers and shoppers have not had to worry about inflation for some time. So when it appears, it will feel ‘new’ and ‘odd’ to people. It will affect the mood of consumers in terms of how they see their personal finances and of how they view the wider economy, and it will affect their inclination to spend. The GfK Consumer Confidence Barometer will capture the changing mood month- by-month as it has done since 1974.
Are we in for a turbulent time in the economy? There’s a lot of talk already about growth of inflation filtering through to households. If we see inflationary pressures in the domestic economy, will increasing prices prompt the Bank of England to change course on interest rates? I don’t see anybody predicting with any confidence when the change will come – we have seen many failed predictions in the past year or two. But it will happen – and higher inflation is an obvious catalyst.
As far as Article 50 is concerned, we just don’t know what terms the UK will seek when it is ready to send its ‘trigger letter’. We don’t know how receptive the rest of Europe will be to discussing such terms. The quicker we get clarity on that the better.
Meanwhile, you can see in the last months of 2016 the clear determination among politicians and pundits to interpret how it will all pan out – even in the absence of clear indications of what the future holds. That’s a recipe for rumour, wrong predictions and worry. That’s why GfK’s Consumer Confidence Barometer will be such a valuable source of information. It will be an indispensable tool for understanding what consumers are thinking as we close 2016 and move into 2017.