Article

The Consumer Tracker Q3 2018

Loss of momentum

October 2018

At a glance

  • Following a record high in Q2 2018, UK consumer confidence declined from -4 to -7 in Q3 2018.
  • This quarter’s fall in overall confidence was primarily due to a decline in sentiment about levels of disposable income, falling by 8 percentage points, its sharpest fall since the Tracker began in 2011.
  • Although consumers were less optimistic about their personal finances in Q3 2018, on average they were still relatively confident about the job market.
  • As consumer confidence falls, consumer spending is also down on both essential and discretionary categories compared to the previous quarter. However, year-on-year, spending increased on transport and utilities in line with the strong rise in energy prices over the last year.
  • Consumers enter the fourth quarter in a relatively cautious mood. Their confidence will most likely be linked to how the Brexit negotiations progress and the manner of the UK’s departure from the EU.

Confidence shows loss of momentum

UK consumer confidence declined in Q3 2018, according to data from the Deloitte Consumer Tracker. Our consumer confidence index fell three percentage points to -7 per cent from -4 per cent in Q2 2018 and is back to where it was a year ago. After a bounce in Q2, confidence has edged lower.

Some pullback seemed likely after our confidence index reached its highest ever level in Q2, a quarter that had it all: a royal wedding, England getting closer to the World Cup final and some of the hottest weather on record. These positives have faded at a time of higher inflation and elevated uncertainty about the manner in which the UK exits the EU which is now less than six months away.

The pullback in consumer confidence is, however, modest compared to the marked decline in business confidence recorded in the latest Deloitte Survey of UK Chief Financial Officers, which shows business optimism at a two-year low. CFO sentiment about the long-term effect of Brexit is more negative than at any time since the EU Referendum with 79 per cent of CFOs expecting the business environment to deteriorate as a result of Brexit.

For business and consumers the risks of a potentially abrupt and disruptive exit from the EU loom increasingly large. The implication is that a deal that secured an orderly exit could help bolster confidence across the economy.

Deloitte consumer confidence index

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

Downbeat over personal finances

Deloitte’s overall confidence index is the aggregate of six individual measures: levels of disposable income, levels of debt, job security, job opportunities and career progression, children’s education and welfare, and general health and wellbeing. This quarter’s fall in overall confidence was primarily due to a decline in sentiment about levels of disposable income and levels of debt.

Confidence in levels of disposable income fell by 8 percentage points, its sharpest fall since the Tracker began in 2011. This is linked to the recent unexpected rise in the rate of inflation to 2.7 per cent in August. The price of food and fuel in particular have risen quite significantly in the last year putting pressure on the cost of consumer essential categories. However, the rate of inflation is forecast to be back close to its 2 per cent target by this time next year as the impact of sterling’s post-referendum fall wanes. In addition, real wage growth has remained modest by historical standards; another reason why consumers might feel they have less money in their pockets.

This quarter’s data also shows that optimism in levels of debt dropped by 5 percentage points compared with the previous quarter, representing the greatest drop since Q2 2012. This coincides with the Bank of England’s decision to increase interest rates by a quarter of a point to 0.75 per cent in August pushing up the costs for mortgage borrowers on floating rates. Moreover, the year-on-year growth rate in all unsecured lending including cars and credit cards slowed to 7.7 per cent in August, its lowest rate in almost three years. While lenders may have become more wary, consumers could also be more reluctant to pay for spending by borrowing, with debt-servicing costs slowly rising.

Although consumers were less optimistic about their personal finances in Q3 2018, on average they were still relatively confident about the job market. With record low levels of unemployment and more businesses reporting a shortage in key skills, the tightening of the job market means that sentiment surrounding job security and job opportunities have remained stable. Consumer sentiment about job security and job opportunities dropped by 1 and 2 percentage points, respectively, leaving those two measures within the narrow range they have been in over the previous three quarters. However, whether strong job growth translates into real earnings growth could be impeded by higher employment costs and subdued productivity growth. According to the latest Deloitte CFO Survey, cost reduction is the top corporate priority and CFOs are more focused on reducing costs than at any time in the last eight years.

Savings: Piggy bank and coins

Back to school

The fall in confidence in personal finances had a negative impact on consumer spending. After a spring of festivities, consumers were more cautious this summer reducing their spending across all the categories measured by the Tracker. Spending was down on both the essential and discretionary categories compared with the previous quarter. However on a on a year-on-year basis, spending increased on transport and utilities in line with the strong rise in energy prices over the last year.

These results contrast with August’s strong retail sales. UK consumers bought 2 per cent more from June to August than in the previous three-month period and 3.4 per cent more than in the same period of 2017, according to the Office for National Statistics. While growth in retail sales is encouraging, structural challenges around cost and competition continue and there is a clear divergence of performance across categories and retail business models. There was slower growth in food sales after the warm weather came to an end and heavy and extended discounting were unable to attract buyers and prevent a fall in clothing sales. By contrast, online retailers continue to report strong growth, outperforming the high street. Online spending now accounts for 18.2 per cent of all retail spending, a new record.

Personal finance: contactless payment

Outlook: The last hurrah?

Consumers enter the fourth quarter in a relatively cautious mood. Prospects for consumer confidence over the next year will be closely linked to the unfolding path of the Brexit negotiations and the manner of the UK’s departure from the EU. The Bank of England has concluded that a no-deal Brexit could trigger a sharp decline in the value of sterling, higher unemployment and inflation, an increase in borrowing costs, and a drop in property prices of about 35 per cent over three years. Such a risk would fade in the event of a deal being struck between the UK and the EU. With UK economic fundamentals remaining solid, and unemployment at historic lows, a deal could set the scene for a rally in consumer sentiment.

Brexit: Union Jack and EU flag

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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