Knowledge & Insight

Consumer Confidence Outlook

Mon 25 March 2019

In a recent paper published by Deloitte, a panel of experts reviews the outlook for consumer confidence and the impact it’s having on UK retail spending.

Consumer confidence trends

Deloitte employs a broad and well-balanced measure of consumer confidence, which in theory should smooth out sharp fluctuations resulting from sector-specific shocks. This ‘basket’ includes disposable income, debt levels, job security, career outlook, health & wellbeing, and children’s education and welfare. Consumer confidence graphs always exhibit a somewhat Alpine profile, with lots of sharp peaks separated by equally dramatic valleys. But since 2011, the overall trend has generally been upward – until mid 2018 that is, when sentiment began to head south. And while consumer outlook in four of the six measures has held up reasonably well, heavily negative sentiment in disposable income and health & wellbeing has been enough to drag down the entire index.

The drivers of declining confidence

Consumer confidence can be a fickle economic indicator, yet it is a very important one in that it drives the daily spending decisions of tens of millions of UK consumers. And although there are plenty of reasons to be cheerful about our future economic prosperity - such as falling inflation, rising wages and very low levels of unemployment - some major issues are having a significant negative impact on confidence, not least of which is the increasingly unstable UK and international political environment. This is considered to be seriously undermining confidence and fuelling uncertainty around job security, with subsequent negative impact on outlook for personal finances.

The consequences

The level of personal consumer confidence plays a role in every spending decision – even in those small, everyday purchases such as a cup of coffee. Yet the influence of confidence as an economic driver is felt most powerfully when people purchase big ticket items that may require credit – such as a cars, holidays, home improvements or a new home. Yet remarkably, the sharp fall in confidence from mid 2018 has been accompanied by a reduction in spending on essential items such as groceries and utilities, as consumers have changed spending patterns by choosing cheaper brands, or shopping in cheaper stores that offer greater value.

Sectors bucking the trend

Fluctuations in consumer confidence generally impact spending across different sectors in different ways. Demand for, and consequently spending on, utilities is highly inelastic, while demand for luxury goods is closely correlated with economic outlook and prosperity. However, despite an overall decline in consumer confidence in late 2018, net spending in restaurants was up 6%, and spending on ‘going out’ was up by 11% compared to the previous quarter. And this is far in excess of expected seasonal fluctuations, as evidenced by the increase in broader leisure spending.  One explanation for this apparent anomaly is that consumers have been diverting their discretionary spending away from more expensive items, towards experience-based spending.

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