The Deloitte Consumer Tracker Q1 2020

The imperfect storm

The Deloitte consumer confidence index* hit a record low in the first quarter of 2020, as the impact of COVID-19 unfolded in the UK. The index fell nine percentage points compared to the previous three months, to -18 per cent – the lowest level since the Deloitte Consumer Tracker began in Q3 2011.

Consumer confidence falls to historic low

Our survey, which took place between 20 and 23 March 2020, indicates that the COVID-19 pandemic is having an impact across all six measures of consumer confidence. Confidence levels around health and wellbeing, household disposable income and job security fell ten percentage points or more compared to the previous quarter.

In addition to the decline in our core confidence index, we also saw consumers’ confidence in the state of the UK economy fall by 43 percentage points from -28 per cent in Q4 2019 to -71 per cent in Q1 2020, with the risk of recession looming.

This unparalleled plunge in consumer confidence reflects the systemic shock that the COVID-19 pandemic is having on consumers’ lives. Close to four in five are worried about their health or that of a loved one, and at the time of the survey, 58 per cent were already heeding self-isolation and social distancing advice.

COVID-19 having systemic impact across all measures of consumer confidence

Amid the COVID-19 pandemic, in the first quarter of 2020 UK consumers felt the most pessimistic about their general health and wellbeing, with the measure plummeting to the lowest level of confidence ever recorded at -28 per cent. Confidence levels in children’s education and welfare also fell significantly in Q1 2020 to an all-time low of -13 per cent, declining further to -31 per cent among those with children in the household. This follows the government’s announcement on 18 March of school closures until further notice and the cancellation of GCSE and A-level exams.

Sentiment around personal finances has also taken a severe knock in Q1 2020. While it has yet to reach the lows reported in 2011 during the financial crisis, results for Q1 2020 reflect a clear shift from the glimmer of optimism consumers demonstrated in Q4 2019 at a time of consistently strong economic fundamentals. The UK lockdown left many businesses struggling to stay afloat, forcing many to lay off or furlough staff. Although government support was announced swiftly, including support to pay up to 80 per cent of salaries to avoid a spike in unemployment, uncertainty around eligibility criteria and payment timelines left many consumers anxious and clearly worried about making ends meet in the short term. As such, confidence in levels of household disposable income in Q1 2020 fell 11 percentage points from the previous quarter to -27 per cent.

During the early stages of the COVID-19 crisis, consumers remained relatively more confident in their ability to cope with their debt in the short term. Sentiment about levels of debt is the measure that registered the smallest quarterly decrease, down only two percentage points to -6 per cent. While some consumers might be able to dip into their savings to help in the short term, loan repayment and rental payment holidays, eviction bans and energy bill support might reassure others.

Despite the job market remaining strong throughout 2019 with unemployment at record lows, the economic shock that the COVID-19 outbreak brought about in a matter of weeks led to an unprecedented rate of job losses. Google search volumes for unemployment benefits in the UK peaked at a level higher than during the financial crisis, and a survey by the British Chambers of Commerce found that 44 per cent of companies expected at least half their staff would be paid through the state-backed wage scheme. Further rises in unemployment seem likely as second quarter GDP in the UK is expected to contract sharply. As a result, confidence in job security saw the greatest decline this quarter, falling by 15 percentage points to -20 per cent, well below levels reached during the financial crisis. Sentiment around job opportunities and career progression was also affected, registering a nine percentage point decline from Q4 2019 to -15 per cent.

Amid all the uncertainty and government-imposed limitations on people’s movement, our data shows a contraction in consumer spending in Q1 2020. Although official data shows that wages continue to grow above the rate of inflation, the gap shrank further in February 2020, as growth in wages slowed faster than inflation, though only marginally. Inflation was at 1.5 per cent in March, a slight decrease from the previous month. The Bank of England (BoE) expects it to decline below one per cent in the spring as a result of the sharp drop in oil prices, which will feed through into lower fuel prices. However, in the longer term the BoE expects the substantial depreciation of sterling to increase inflationary pressures.

At the same time, unsecured lending to individuals showed signs of a slowdown in February 2020 when it rose by only 5.7 per cent, down from six per cent in January. There are also likely to be further declines in the months ahead despite the BoE announcing an emergency cut in interest rates from 0.75 per cent to 0.25 per cent, which took borrowing costs down to historic lows.

However, cheap consumer credit is unlikely to be sufficient to sustain demand during the lockdown, at a time when opportunities to spend are severely limited, and worries about job security and household disposable income lead consumers to prioritise essential purchases. According to our research, in the last three months net consumer spending contracted eight percentage points compared to Q4 2019, as spending in discretionary categories collapsed by 13 percentage points and essential spending fell by four percentage points.

Figures for net spending in individual categories reflect the fact that opportunities to spend on going out, restaurants and clothing were severely restricted with lockdown closures, while spending on alcohol and tobacco is up from the previous year as consumption moved in-home. The impact of the pandemic is also reflected in the distribution of net spending among essential categories, with consumers spending less on transport and more on health – the only category with a positive quarterly shift (of three percentage points).

As panic and bulk buying surged amid the COVID-19 outbreak, net spending in the grocery category increased five percentage points this quarter compared to a year ago. Half of consumers put increased spending on grocery down to changes in prices, though the official data shows there is little change in price inflation on food items between February and March 2020, despite an actual increase year on year. However, increased spending on grocery might also reflect increased in-home consumption, as well as stockpiling behaviour and the need to trade up due to restocking issues during the early stages of the outbreak.

​* 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.

Outlook

On the basis of many financial market indicators, the impact of the COVID-19 pandemic has equalled or surpassed the shock seen during the 2008 global financial crisis. The speed and scale of the economic downturn generated by this health crisis are unprecedented, as are the breadth and scope of the measures introduced by the government to shield the population and the country’s economy. The Financial Times estimates that public spending announced in the UK to counter the crisis amounts to over £60 billion, or three per cent of UK GDP.

With uncertainty surrounding the scale of the impact on the UK’s GDP – economic forecasts range between a contraction of -3 and -30 per cent – consumers increasingly fear a lengthy economic downturn. Sentiment on the state of the economy fell 43 percentage points quarter on quarter to -71 per cent, and consumers anticipate the economy contracting further over the next three months, before any notable improvement.

Looking ahead, consumers enter the second quarter of 2020 expecting things to get worse before they get better, with rising unemployment and business default risks likely to damage confidence further and to exacerbate the ongoing squeeze in consumption.

Over the next three months, as government-mandated closures continue to limit their opportunity to spend, consumers expect to cut back further on their discretionary spending, especially in the going out, restaurants and holidays categories. It remains unclear whether such spending will be deferred, or whether the outbreak will bear long-term consequences on people’s lives after the lockdown is lifted.

Net spending on essential categories is also expected to remain subdued into the next quarter, with a negative net balance (at -0.1 per cent) for the first time since Q1 2016. A drastic decrease in spending on transport is offset by anticipated increases in spending on grocery during the lockdown, but also on health, media services and utility bills.

Key contacts

Simon Oaten

Partner, Hospitality & Leisure

Ben Perkins

Head of Consumer Research

Sara Ballaben

Research Manager

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