Belfast Telegraph

Economy Watch: Why we need more consumer spending if economy is to grow

 

By Conor Lambe, chief economist Danske Bank

For consumers and consumer-focused businesses in the UK, the economic data for the first part of 2018 has told two slightly different stories. For consumers, there are some positives to take from the data. The latest numbers show that inflation fell from 3% at the end of last year to 2.5% in March and the rate of wage growth has increased to 2.8%.

Gradually falling inflation, coupled with faster growing earnings, could signal the early stages of the consumer squeeze unwinding. But it hasn't disappeared yet.

For businesses that predominantly sell to consumers, the start of this year has been relatively challenging. In the first quarter of 2018 the volume of retail sales in Great Britain declined by 0.5% compared with the final three months of last year.

The lingering effects of the consumer squeeze, along with the bad weather and heavy snow that struck the UK, are likely to have contributed to this fall in activity.

Retailers will be hoping that this was just a temporary blip and that sales will pick up in the months ahead.

In Northern Ireland, there is more positive news relating to consumers. The Danske Bank Northern Ireland Consumer Confidence Index, published today, shows that local confidence levels bounced back strongly at the start of the year.

Our index is based on a starting value of 100 from the third quarter of 2008. In the first quarter of 2018, the consumer confidence index posted a reading of 142 - up from 123 in the last quarter of 2017. The Q4 reading for 2017 represented the lowest point in the index for some four years.

When compared with a year ago, the increase is not as large. In the first quarter of last year, consumer confidence also increased sharply. The 142 posted at the start of this year is above that registered in the first part of 2017, but only by one point.

Focusing on the change over the quarter, there was positive news across the board. People started this year feeling more confident about their current financial position, their future financial position, their job security and the amount they expect to spend on expensive items.

As part of the survey, we asked what factor was having the largest positive impact on confidence levels. Somewhat surprisingly, people weren't completely sure what made them feel better.

Almost 40% of respondents answered 'don't know'.

The answer which received the next highest number of responses was low interest rates. Despite the rise last November, those surveyed seemed to recognise that interest rates remain low compared to previous historic averages and that had a positive impact on their confidence levels.

The proportion of people selecting low interest rates as a key factor driving optimism was higher among the 25-34 and 35-49 year old age groups.

As these are age ranges when people typically take out mortgages, it is understandable that these groups within society felt that they were benefiting from the current low rates.

For people over 50, the percentage highlighting low interest rates as the factor that had the biggest positive impact on confidence was lower.

The other responses to this particular question received a similar number of responses. Ten percent of people felt confident due to rising house prices, 9% identified the strong global economy as having a positive impact on them, another 9% selected the UK Government's longer-term Brexit objectives and 8% progress during Brexit negotiations in recent months.

Despite the rise observed in our index, there were still a number of factors that had a negative impact on local consumer sentiment.

Once again, more than 30% of people highlighted political uncertainty and the lack of an Executive as the factor that had the largest negative impact on their confidence levels.

A significant number of people also pointed to the impact of high inflation, reflecting the fact that despite the gradual decline in inflation this year, it remains above the Bank of England's official target rate. Brexit was also identified by some as a drag on confidence levels.

An increase in consumer confidence is good news, however, we should not get carried away just yet.

The squeeze that consumers faced throughout 2017 is expected to ease gradually as we move through this year and into next year. However, this is unlikely to be a rapid process.

Consumer spending is projected to grow faster in 2018 and 2019 than it did last year. But for the economy to move into a higher gear, we need to see consumer spending growing at a faster rate than we currently expect.

Belfast Telegraph

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