Brexit still wor­ry­ing us

Conor Lambe on why con­sumer con­fi­dence has wob­bled

Belfast Telegraph - Business Telegraph - - Front Page - by Danske Bank economist Conor Lambe @conor­lambe

Con­sumer spend­ing is the main driver of the UK econ­omy. Spend­ing by house­holds makes up over 60% of the UK’S GDP. In 2015, the UK econ­omy grew by 2.2% and con­sumer spend­ing was re­spon­si­ble for 1.5 per­cent­age points of that growth.

So the be­hav­iour of con­sumers will clearly have sig­nif­i­cant im­pli­ca­tions for eco­nomic growth in the UK, and in North­ern Ire­land, in 2017.

Given the im­por­tance of con­sumer spend­ing to the lo­cal econ­omy, the Danske Bank North­ern Ire­land Con­sumer Con­fi­dence In­dex is pub­lished ev­ery quar­ter to gauge how op­ti­mistic con­sumers are feel­ing and how likely they are to spend in the months ahead.

The in­dex con­sists of four sub-com­po­nents. These are con­sumers’ opin­ions of how their cur­rent fi­nan­cial po­si­tion com­pares to the pre­vi­ous year, ex­pec­ta­tions of how their fi­nan­cial po­si­tion will change over the next 12 months, rat­ings of job se­cu­rity over the next year and ex­pec­ta­tions of the amount they will spend on high value items, such as fur­ni­ture and hol­i­days, over the com­ing 12 months.

We also col­lect data on con­sumers’ ex­pec­ta­tions of the amount they will save in the next year, although this doesn’t feed into the over­all in­dex num­ber.

We have data go­ing back to the third quar­ter of 2008 and our in­dex is con­structed so that the value in that quar­ter is set to 100.

The over­all in­dex hit its low­est point, with a value of 94, in the third quar­ter of 2011, and peaked at 141 in the third quar­ter of 2015.

In the third quar­ter of 2016, fol­low­ing the EU ref­er­en­dum, our con­sumer con­fi­dence in­dex fell by two points to a value of 137.

Last week, we pub­lished the in­dex for the fourth quar­ter of 2016 which re­vealed that con­sumer con­fi­dence dropped by an­other five points, down to 132 in the fi­nal quar­ter of the year.

This also rep­re­sented a fall of three points when com­pared with the last quar­ter of 2015.

The drop in the over­all value of the in­dex sug­gests that the un­cer­tainty that has come about fol­low­ing the out­come of the Brexit vote is weigh­ing on con­sumer sen­ti­ment.

This is not en­tirely un­ex­pected, given that North­ern Ire­land was one of the UK re­gions that voted to re­main in the EU and it would be the hard­est-hit re­gion if there is a sig­nif­i­cant change to the bor­der ar­range­ments with the Republic of Ire­land.

Looking at the sub-com­po­nents of the in­dex also re­veals some in­ter­est­ing in­for­ma­tion. The sub-in­dex based on opin­ions of how con­sumers’ fi­nan­cial po­si­tion com­pares to the pre­vi­ous year fell over the quar­ter and over the year.

The fact that con­sumers feel less con­fi­dent about their fi­nances rel­a­tive to last year could be partly ex­plained by the fact that in­fla­tion is ris­ing. In De­cem­ber 2015, UK in­fla­tion stood at 0.2%.

But the in­fla­tion rate was 1.6% at the end of last year. There­fore, some house­hold bud­gets may have felt rel­a­tively more squeezed at the end of 2016 com­pared with the end of 2015.

The largest fall across the sub-com­po­nents of the in­dex was in the se­ries on ex­pec­ta­tions of how house­holds’ fi­nan­cial po­si­tion will change over the next 12 months.

The sharp de­cline in this part of the in­dex is con­sis­tent with ex­pec­ta­tions of higher prices in the year ahead.

In­fla­tion is likely to move above the Bank of Eng­land’s 2% tar­get later in 2017 and this will squeeze real wage growth and put down­ward pres­sure on con­sumers’ pur­chas­ing power.

This can also help ex­plain why con­sumers’ ex­pec­ta­tions of the amount they will spend on high value items over the next year dropped by seven points over the quar­ter and one point over the year.

How­ever, the lat­est sur­vey un­veiled some en­cour­ag­ing news about the labour mar­ket. Con­sumers’ ex­pec­ta­tions about job se­cu­rity rose in the fi­nal quar­ter of last year. The un­em­ploy­ment rate in North­ern Ire­land cur­rently stands at 5.6% which is above the rate in the rest of the UK but lower than it was for 2014 and 2015.

The num­ber of peo­ple claim­ing un­em­ploy­ment-re­lated ben­e­fits in North­ern Ire­land also fell for the ninth month in a row in De­cem­ber 2016.

It is pos­si­ble that the un­em­ploy­ment rate could rise this year in light of the Brexit-re­lated un­cer­tainty, but con­sumers seem to be buoyed by the re­cent per­for­mance of the lo­cal labour mar­ket and are op­ti­mistic it won’t ex­pe­ri­ence a sharp down­turn in the short-term.

Turn­ing to sav­ings, our sur­vey re­vealed that 9% of re­spon­dents ex­pect to save more than in the last year, but 20% ex­pect to save less. This could be be­cause con­sumers ex­pect to have less dis­pos­able in­come left over for sav­ing this year.

Our in­dex shows that con­sumer con­fi­dence fell in both quar­ters fol­low­ing the EU ref­er­en­dum, and that con­sumers feel less op­ti­mistic about mak­ing large pur­chases this year.

How­ever, the low in­ter­est rate en­vi­ron­ment con­tin­ues to sup­port house­holds, and con­sumers will keep spend­ing on smaller items and leisure ac­tiv­i­ties over the next 12 months.

There­fore, it is likely that con­sumer spend­ing will rise this year but we think that the rate of growth will slow and this is sup­ported by the drop in con­fi­dence lev­els shown by our lat­est sur­vey.

In next week’s Econ­omy Watch, we hear from Neil Gib­son of the Ul­ster Univer­sity eco­nomic pol­icy cen­tre

Con­sumers feel less con­fi­dent about their fi­nances than they did last year, partly due to ris­ing in­fla­tion

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