The Consumer Tracker Q2 2018

Confidence on the up as consumers defy expectations

July 2018

Consumer confidence continues recovery

Consumer confidence improved in the second quarter of 2018, according to the latest Deloitte Consumer Tracker. Overall consumer confidence grew by two percentage points to -4% benefitting from the effects of a strong labour market, gradual wage growth and the feel-good factor associated with the start of the summer. This represents the highest level of consumer confidence since the Tracker started in 2011 and comes after a year of consistent growth from a low point of -10% in Q2 2017. However, there is a note of caution alongside these results as confidence remains in overall negative territory.

Deloitte consumer confidence index

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

Improvement despite stresses on the high street

Consumer confidence rose against a backdrop of contrasting fortunes for businesses. The high street is perhaps the most visible casualty of the challenging business conditions that have persisted over the last few years. As reported in Q1, increased competition from online retailers and rising costs have created unprecedented challenges. In Q2, traditional bricks and mortar retailers and casual dining operators have continued to struggle with increases in business rates, commodity prices, and employment and pension costs.

And, it is not just the high street that is suffering. As Brexit negotiations continue to dominate the headlines, concerns among businesses about the long-term impact of Brexit have increased. Deloitte’s latest CFO Survey ranked Brexit as the number one business risk, with CFO pessimism over the long-term impact of Brexit at its highest level since the question was first asked in Q2 2016. In fact, as many as three-quarters of CFOs expect Brexit to lead to a worsening in the overall environment for business in the long term.

Growth in consumer confidence underpinned by economic fundamentals

Overall consumer confidence is calculated as an aggregate of six individual measures: job security, job opportunities, disposable income, level of debt, children’s education and welfare, and general health and wellbeing, all of which have seen significant growth over the last year.

A strong labour market, supported by record low levels of unemployment and more businesses reporting a shortage in key skills, has driven increased consumer confidence in both job security and job opportunities. Confidence in job security has grown by two percentage points year on year to -4% in Q2 and confidence in job opportunities has grown by seven points in the same period and is now in positive territory for the first time at +1%.

The strong labour market and in particular the shortage in key skills are also having an impact on consumer confidence in disposable incomes as wages are forced up under such conditions. Consumers appear to have found some relief in gradual, nominal wage growth and falling inflation. Low levels of wage growth over the last two quarters, combined with the rate of inflation falling to 2.4%, after a high of 3.1% at the end of 2017, have created more favourable conditions for the consumer. As a result, confidence in disposable income has grown by 13 percentage points year on year to -11% in Q2 2018.

And although UK household debt remains at historically high levels (around £1.8 trillion of which 75% is mortgage debt), confidence in managing debt has increased by five percentage points year on year to -1%. While there is concern that household debt as a ratio to income is on the rise again, this growth is primarily driven by mortgages, with unsecured lending to individuals, including credit cards and overdrafts, actually declining over the last 18 months.

Growing confidence starts to translate into spending

In a quarter that brought warmer weather, the build up to, and opening matches of, the 2018 FIFA World Cup and the much heralded Royal Wedding, consumers were given plenty of reasons to spend money.

Over the last year, as their confidence has increased, consumers have exercised caution when it comes to spending, favouring essential categories over discretionary categories and cutting back on leisure spending. This quarter consumers have continued to prioritise spending on essential categories, but the gap between essential and discretionary spending has shrunk, with seven out of the eight discretionary categories we measure showing positive movement.

In terms of retail sales, 2018 has outperformed expectations. In the first five months of the year, the value of sales grew by +3.9%. With overall sales increasing, retailers that have been facing structural challenges around cost and competition might have expected a boost. However, consumer spending habits have changed significantly over the last year and it is actually online retailers that have benefitted the most from the growth in sales. In the first five months of the year, online sales grew by +15% year on year compared to just +1.7% in-store. As a result, online sales have accounted for over 65% of all growth in retail year to date.

Underlying resilience bodes well for the future

Looking ahead, there are a number of challenges facing the UK economy, but if a strong labour market, low levels of inflation and gradual wage growth are sustained, then consumer confidence has the potential to continue growing in the second half of 2018.

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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