Emeritus Professor Joe Nellis is Head of Economic Research at MHA, the accountancy and advisory firm.
An improvement in the GfK Consumer Confidence Index from -23 in June to –17 in July, and now to –14 in August, marks an important move in the right direction after a prolonged period of pressure on household finances, if not quite a surge in optimism.
Part of the improvement reflects what could increasingly be described as the “Burnham Bounce.” The appointment of Andy Burnham as Prime Minister has brought an instant change in political tone and, at least initially, a degree of optimism that a new government may take a different approach to the cost of living, growth and household finances.
But while Prime Minister Burnham has announced a number of inexpensive, feel-good measures to somewhat alleviate constraints on household spending, the question remains whether this improved confidence will hold when he and his Chancellor are forced to make difficult decisions at the upcoming Autumn Budget. Any increase in the tax burden for consumers is likely to undo any recent gains.
There has also been a genuine summer feel-good factor. Britain’s long, hot summer has enticed households to get out, travel and spend, while a run to the World Cup semi-finals has provided a much-needed boost to the (English) national mood. These effects are only temporary, but consumer confidence is influenced by how people feel as well as by what appears on their payslips.
Importantly, households have also positively benefited to some extent from the temporary reduction in VAT from 20% to 5% on parts of the leisure and hospitality economy, introduced by Rachel Reeves in one of her final major announcements as Chancellor. The measure, which runs from 25 June to 1 September, covers areas including theme parks, zoo and museum admissions, and children’s meals. Coming at the height of the summer holiday season, the tax reduction has lowered the cost of some family leisure activities. It will have provided an additional, albeit small, boost to confidence and discretionary spending.
But it must not be overlooked that a reading of –14 remains firmly negative. The jump in inflation to 2.9% in July announced on Wednesday is a reminder that inflationary pressures still remain – and are expected to increase further in the months ahead. The impact on household bills and the uncertainty over employment continue to weigh heavily on consumers. We remain a long way from an economy where consumers are feeling positive about the future.
