UK Consumer Confidence, Retail Sales Improve But Public Debt Worsens

UK consumer confidence is on the up despite inflation of 4.2%, and with Christmas shopping starting early also helping retail sales to beat forecasts for November.

According to research by Gfk consumer confidence in November improved from -18 to -14, based on the balance between those who are pessimistic and those who are optimistic about the economic outlook and the state of their finances.

Consumer confidence fell a month ago when the fuel and energy crisis plus inflation worries hit sentiment.

Retail sales were forecast to have fallen October by -2.0% compared to a year ago but actually fell -1.3%. Month on month sales were forecast to improve by 0.5% but actually rose by 0.8%, thought to be s a result of consumers starting to shop early for Christmas in response to fears about shortages.

In a busy end of the week for UK economic data, public borrowing data for October was also released today.

Unfortunately for Chancellor Rishi Sunak net public borrowing was higher than forecast, at £18.8 billion compared to a forecast of £13.8 billion.

The poor performance on borrowing was due to higher interest payments on government debt and unexpectedly high procurement costs which was due to the vaccination rollout.

However, the most worrying factor for the chancellor will be the impact of higher interest payments on debt, with a large proportion off UK debt being short duration.

With interest rates set to rise as early as December, this will add substantially to repayment costs.

Nevertheless, retail sales holding up better than expected and consumer confidence picking up, will encourage the view that the economic recovery is on firm ground, given that consumer spending on goods and services in the mainstay of the UK economy.

Black Friday on course to be a blockbuster for retailers

With Black Friday beginning on the last Friday of the month (26 November), retailers will. The US-imported shopping sales day has become a key date on retailers’ calendar that further reinforces the fact that most retailers will become profitable on the basis of their taking in the run-up to Christmas.

Amazon and a number of other retailers brought forward their Black Friday discounting.

The negative impact of Covid on last year’s Christmas festivities may also be adding to the surge in spending as families look to make up for the curtailed activities in 2020 by splurging on spending this year.

Client strategy director at GfK, Joe Staton, noted that there was also an unexpected improvement in the major purchases sub index by 7 points. He sees this as indicative of the fact that “shoppers are ready to bounce back after last year’s cancelled family gatherings, with a Christmas splurge in coming weeks.”

However, the other side of shopping early could be that the spending eases off earlier than might otherwise have been the case. In other words, if you are buying your Turkey earlier you are not going to be buying one later.

Fear of shortages distorting buying patterns

So the distorting effect of shortages – perceived and real – may come back to bite certain retailers.

In an indication of how fear of certain key food items being absent in the shops is seen in an insurance scheme for Turkeys being run by supermarket Iceland. If you select a delivery slot for a turkey from the store by 22 November then your bird is guarantee.

It is a clever marketing idea because to be eligible you of course first have to sign up to an Iceland account in order to grab a delivery slot (which must be between 11 – 16 December) – and the guarantee only applies for the first 150,000 customers who register.

Returning to the major purchases sub index, consumers feeling in a better position to make larger purchases could also be related to inflation, with expectations of even higher inflation in the future encouraging people to buy bigger ticket items now instead of waiting when prices could be higher.

Uk consumer sentiment: inflation yet to impact, tight jobs market a boost

Therefore, the overall impact of inflation is still likely to be negative on consumer expenditure, although this may be masked to some extent as consumers bring forward some purchases.

Added to that is taxes going up for the average taxpayer by as much as £3,000 next year, making the UK the most fiscally contractionary economy in the G7.

“We do see as one of the downside risks the possibility that higher inflation, coupled with a higher tax burden and rising interest rates, will see consumer spending moderating over the coming months,” says Yael Selfin, chief economist at KPMG UK.

As far as consumer sentiment goes, a key influencer tends to be employment prospects.

Labour market vacancies are currently running at record levels, so this may be feeding into a feeling of economic well-being as individual feel more secure in their employment positions.

The prospect of being able to increase remuneration by either negotiating for higher pay or changing job to achieve the same end may offset some of the concerns about inflation and the rising cost of living.