Decoding Consumer Confidence and its Impact on the UK Economy
As the calendar flips to a new year, it's a chance for a fresh start. While the latest economy reports don't confirm a significant shift, they also don't support the naysayers predicting a downfall. The reality is, it's neither a boom nor a bust. But the new year provides a chance to reset policy, instill confidence, and most importantly, change the economic mood.
Understanding Consumer Confidence
Consumer confidence is a key indicator that could reveal a lot about the current state and future outlook of the UK's economy, and possibly even its political direction. This is determined through consistent surveys that have been conducted for over five decades. These surveys essentially gauge the nation's economic mentality by asking how people feel about the economic prospects, their likelihood to make large purchases, and the state of their personal finances.
The method to calculate net confidence is simple: subtract the pessimism score from the optimism score. Over the years, this data has shown interesting and consistent patterns and has been crucial in predicting the continuity of those in power.
Noticing a Shift in Trends
However, a noticeable shift can be seen in the recent data. The analysis of consumer confidence divided by age groups used to show a correlation. All age groups, starting optimistically in their youth and becoming less positive as they aged, reacted similarly to major events. This was true for all age groups during the post-Brexit era and the pandemic.
However, towards the end of 2024, a significant divergence was observed. The younger population, especially those under 30, showed a surge in consumer confidence, unseen since Brexit. But the older population, those above 50, experienced a significant dip in consumer confidence.
The Role of Politics
This divergence seems to coincide with the 2024 General Election. While it's not accurate to assume that correlation implies causation, it's interesting to note the timing of this shift. A plausible explanation could be the reversal of the flow of causality from economic sentiment to political sentiment. In other words, instead of your financial status influencing your vote, your political choice now influences your economic outlook.
For instance, the younger generation, who predominantly lean towards the liberal left, seem happier now after enduring a series of crises, largely due to a government they supported in 2024. The older generation, however, who mostly voted for Conservative and Reform, appear discontented and skeptical about the future.
Other Contributing Factors
Another possible factor could be the influence of social media and the negative portrayal of the economic situation it often presents. This could explain why older population, who are more likely to be exposed to these portrayals, are feeling more negative.
Additionally, the rebound in confidence among young people coincides with the period when the Bank of England began reducing interest rates. Lower interest rates are generally beneficial for young people seeking homes or jobs but can negatively impact older people who rely on savings.
Economic Implications
If the trends observed in consumer confidence are accurate, they could have significant economic consequences. For instance, this might explain the unusually high savings rate in the UK. The older population, discouraged by the economic situation, could be holding onto their savings instead of spending, thereby suppressing GDP growth, even as wages rise faster than inflation for most workers.
Looking Forward
The government is hoping for a fresh start in 2025, spurred on by an investment boom, as evidenced by recent announcements on infrastructure projects. But will the politically-charged perceptions of economic confidence act as a stumbling block? Only time will tell.