As 2023 drew to a close, there was a notable improvement in how the UK public perceives its economic prospects, despite the persistent struggles with a cost-of-living crisis. Although consumer confidence registered positive momentum throughout the year, it’s essential to note that it still resides in negative territory, reflecting the prevailing uncertainties in the economic landscape.
Inflation continues to cast a shadow over the UK, with consumer price inflation consistently surpassing the Bank of England’s 2% target. Concurrently, interest rates have climbed to levels not witnessed since the aftermath of the 2008 global financial crisis. The outlook for the UK economy in 2024 appears uncertain, prompting a closer examination of the role played by the evident optimism in consumer sentiment.
Renowned British economist John Maynard Keynes once delved into the concept of “animal spirits,” referring to the psychological factors guiding firms’ investment decisions. However, economists now recognize the significance of individuals’ sentiments in shaping economic predictions. As consumer confidence defies negative indicators, questions arise about the impact of this optimism on economic forecasts.
Traditionally, economists gauged a nation’s financial prospects by focusing on households’ capacity to consume. The expectation of future household income was considered a crucial determinant of current consumption. For instance, individuals might exercise caution in spending if they anticipate a surge in inflation in the coming year. However, during challenging times, economists increasingly emphasize the importance of willingness to consume, encapsulated by the term “consumer sentiments.”
Consumer sentiments reflect the psychological state of households, emphasizing people’s feelings rather than the current reality of their finances. Optimism in this context indicates a greater willingness to spend, while pessimism suggests a proclivity towards saving. In the UK, consumer sentiment is monitored through the GfK Consumer Confidence Barometer, a monthly survey mirroring the University of Michigan’s Surveys of Consumers in the US.
These surveys delve into participants’ personal finances, opinions on the general economy, plans for significant purchases, and forward-looking perspectives. In the US, the focus leans towards households’ forward-looking views regarding the overall economy.
Consumer surveys gain significance due to their ability to capture shifts in people’s willingness to spend, influenced by special or extreme events. Historical examples such as the 2007-08 financial crisis, the COVID-19 pandemic, and Russia’s invasion of Ukraine underscore the impact of such events on consumer sentiment. Recent research suggests that positive news about the general economy tends to have a more lasting and substantial impact than negative news.
In the US, recent positive developments, including a decline in jobless rates to their lowest since July, coupled with the promise of lower inflation, have significantly boosted consumer sentiment. December witnessed a sharp increase after a continuous four-month decline. The US Federal Reserve’s indication of holding or potentially lowering interest rates in 2024, as inflationary pressures ease, has contributed to this positive sentiment.
Conversely, the UK presents a somewhat different picture. While inflationary pressures have somewhat eased, the current rate of 3.9% still exceeds the Bank of England’s 2% target. Unlike the US, the Bank of England appears less inclined to cut interest rates in the near future. Additionally, recent economic growth data has been disappointing, with a contraction of 0.3% in October and unemployment rates hovering around 4.3%, coupled with slowing wage growth.
Despite these challenges, consumer confidence in the UK has witnessed a rebound over the last two months, following a sharp decline in October. The dip in October could be attributed to the Gaza conflict, heightening fears of its potential impact on the global economy.
Both UK and US consumers currently express optimism about their personal finances and the broader economy. A common thread in both economies is the alleviation of inflationary pressures, offering hope for easing the burden of the ongoing cost-of-living crisis. However, even as confidence grows, both countries remain in the throes of economic uncertainties, underscoring the fragility of the current economic outlook.