The Consumer Tracker Q1 2018

Consumer confidence rises, underlying caution remains

April 2018

Consumer confidence returns to an upward trajectory

Consumer confidence grew in the first quarter of 2018 according to the latest Deloitte Consumer Tracker. Consumer confidence grew by one percentage point to -6% as the economic pressures felt by consumers over the last year began to ease. In the first three months of the year, the rate of inflation was falling, wages were rising, and in March a Brexit transition deal was agreed.

Consumer confidence is now at its second highest level in the history of the Deloitte Consumer Tracker and despite confidence still remaining in negative territory, the Q1 2018 results are another encouraging step forward from a low point of -10% in Q2 2017.

Deloitte consumer confidence index

Net % of consumers who said their level of confidence has improved in the past three months

Economic conditions favour the consumer

The individual drivers of consumer confidence tell a positive story. Consumers continue to feel more upbeat about their personal finances, reporting increased levels of confidence in their disposable income (up two percentage points) and the ability to manage their levels of debt (up two percentage points) compared to the previous quarter. The prospects for continued growth in these two areas look positive. After a period of rising prices and low wage growth, economic conditions have begun to turn in favour the consumer. The rate of Inflation has fallen to 2.5% in March from a high of 3.1% in November 2017, increased demand for labour is starting to push wages up, unemployment remains low and, despite the 25 basis point hike in interest rates in November 2017 (with the market's pricing in another 25 basis point hike in May), borrowing costs remain at historically low levels.

The one area that consumers are less confident about is job security (down two percentage points vs Q4 2017). This result appears to go against expectations given the strength of the labour market. However, despite low levels of unemployment and growing confidence about job opportunities (up one percentage point vs Q4 2017), Q1 2018 saw a series of high profile administrations alongside a number of large consumer businesses announcing significant headcount reductions which may have weighed heavily on the mind of the consumer.

Consumers remain cautious

Despite the positive economic outlook and growing consumer confidence, results from Deloitte’s Consumer Tracker suggest that these are yet to translate into an increase in spending.

Consumers continue to prioritise their spending in essential categories such as utility bills, housing, transport, and food and drink, while remaining cautious with their spending on discretionary areas such as going out, furniture, electronic appliances, and alcohol and tobacco. Compared to Q1 2017, consumer spending on essentials grew by one percentage point to +13% and spending in discretionary categories remained flat at -6%.

This caution is reflected in overall UK retail sales figures. The level of retail sales growth is slowing, with performance differing significantly across sectors. Essential categories such as food and drink have seen strong sales growth, driven in part by inflation, while conditions remain more difficult for retailers of discretionary goods such as clothing and footwear.

Retailers are suffering

Cautious spending, increased competition and rising costs have created unprecedented challenges over the last year. 2017 saw increases in business rates, commodity prices, wages and pension costs alongside a fall in the value of the pound, meaning that many retailers saw their already slim margins reduced, or in some cases, eliminated. As a result, a number of retailers operating in the general merchandise and clothing sectors have been forced into administration.

It is not just retailers that are under pressure. A number of casual dining operators have suffered as a result of a squeeze on consumer spending and increased labour and real estate costs which in turn have led to a number of CVAs (company voluntary agreements) and restaurant closures.

The ‘Beast from the East’ takes its toll

In addition to the challenges already facing consumers and the businesses that serve them, the weather also had a major impact. The so-called ‘Beast from the East’ and Storm Emma combined to produce some of the most difficult weather conditions the UK has experienced for many years. The amount of snow significantly affected supply chains, deliveries and high street footfall over a prolonged period.

Reasons to be (cautiously) optimistic

Looking ahead, there are reasons to be optimistic. From a business perspective, the Brexit transition deal has removed some uncertainty about the year ahead and had a positive effect on the corporate mood (Deloitte’s latest CFO survey reports that Business confidence has grown by nine percentage points this quarter and is now running not far off its long-term average). While Q2 consumer confidence should benefit from the increased optimism associated with the belated arrival of warmer weather and the prospect of both a Royal Wedding and the football World Cup which are events that have historically provided a boost to consumer spending across a range of categories.

However, consumers could continue to exercise caution in 2018. Memories of tougher times could yet outweigh improving economic conditions and consumers’ willingness to spend.

A note on the methodology

Some of the figures in this research show the results in the form of a net balance. This means that in a survey of 100 respondents, assume that 30 reported they are spending more, 50 reported no change and 20 reported they are spending less. The net balance is calculated by subtracting the number that reported they spent less from the number that reported they spent more, i.e. 30 – 20 = 10. This means 10% of consumers reported that they spent more rather than less.

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