UK consumer confidence has hit all-time lows and there may be worse to come as inflation soars.
- The GFK Consumer Confidence index reported its lowest level since records began in 1974.
- Goldman Sachs is now suggesting inflation could go as high as 22% if energy prices continue to rise.
- Financial data provider Moneyfacts said the average new two-year fixed rate tipped over 4% for the first time since 2013
The UK consumer is feeling distinctly gloomy. The GFK Consumer Confidence index reported its lowest level since records began in 1974. In a single year, the index has gone from +3 to -44 as the cost of living soars.
The group said “These findings point to a sense of capitulation, of financial events moving far beyond the control of ordinary people. With headline after headline revealing record inflation eroding household buying power, the strain on the personal finances of many in the UK is alarming.”
The situation may get a whole lot worse before it gets better. Goldman Sachs is now suggesting inflation could go as high as 22% if energy prices continue to move higher. It expects the price cap to rise by 80% in January. This comes on the back of a similarly gloomy forecast from Citi, which put inflation at 18% by January 2023.
Households must also deal with rising mortgage rates. Financial data provider Moneyfacts said the average new two-year fixed rate tipped over 4% for the first time since 2013 at the start of this month. This will slowly start to affect more households as fixed rate deals roll over. The average new five-year fixed rate has now reached 4.24%, up from 2.64% in December 2021.
All in all, it is hardly surprising that the consumer is feeling low. For many households, the sums simply don’t add up and they have little left at the end of the month to spend on anything ‘discretionary’ – clothes, leisure, travel.
This is a disaster for the UK economy: household consumption is the largest element of expenditure across the economy, accounting for 59% of the total in 2021. Goldman Sachs reckons GDP could contract by 3.4%, but that is starting to look optimistic.
There is a question over whether the incoming Prime Minister may be able to shift the dial on consumption. Tax cuts may provide a short-term boost, but there is a risk that this exacerbates the inflationary problem by directing money to higher earnings households, which are experiencing less stress. Either way, it suggests a very difficult backdrop for consumer discretionary sectors, plus travel and leisure.
The UK economy feels like it is at breaking point. It is difficult to find reasons to be optimistic abouts its prospects from here.
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