Nationwide's Consumer Confidence Index recorded a second consecutive improvement in confidence in February, but the overall picture remains subdued as consumers continued to be downbeat following three interest rate hikes. Their greatest concerns were about the current economic and employment conditions.
Consumer confidence remains depressed following increasing interest rates
The Nationwide Consumer Confidence Index was broadly stable in February after its recent volatility; however its path suggests that consumers are responding to the three rates hikes since August. The first rate change appeared to shock consumers, but confidence recovered quickly. Subsequent rises were not followed by the same bounce back in confidence and overall sentiment now remains fairly downbeat. The Nationwide Consumer Confidence Index ticked up by 1 point to 85 in February, but this remains significantly below the 94 recorded immediately before the rate rises and only marginally above the low point of 83. All indices are compiled in partnership with TNS.
Consumers certainly seem gloomier about the present economic and employment situation as they face higher debt repayments than before the rate rises. The Present Situation Index fell by 2 points to 84 in February – its lowest ever level – and down from 92 only three months ago. The fall in the index over this period is largely due to feelings about the economic and employment situation perhaps affected by the surprise interest rate rises, but there also seems to be some uncertainty about how these rises are affecting jobs. A smaller proportion of people feel there are many jobs around now than did before the rate rises, with 47 per cent of consumers believing there are currently many jobs available compared to 53 per cent in July 2006. The overall feeling is that the employment situation is broadly stable; this may be a sign there is a little more slack in the market than there has been.
Future expectations improve
Looking to expectations, the Spring weather seems to have brought with it some optimism for the future. Consumers’ view of the economy and employment in six months time bounced back to 86 in February from January’s 82. Consumers may be showing that they are prepared to accept interest rate medicine taken today to make things better for the future. However, consumers are significantly less optimistic than they were before the rate rises, when the Expectations Index was 11 points higher at 97.
Spending confidence returns with the Spending Index up from 90 to 94
Spending intentions in February rebounded strongly with fewer consumers feeling that now is a bad time to buy either household goods or major purchases. Fierce competition and discounting on the high street particularly, is likely to have affected sentiment compared to the recent past, but overall spending confidence still remains significantly lower than before the rate rises.
Fionnuala Earley, Nationwide’s Chief Economist, said: “The Nationwide Consumer Confidence Index seems to be showing that consumers are responding to the three increases in interest rates. All of the indices are well below the levels recorded before the first rise in rates. Consumer sentiment remains fairly downbeat, but underlying feelings about jobs and income have not collapsed which suggest a fairly stable economic background. The MPC is clearly in hawkish mood, but its members should take some heart that consumers are responding to their recent interest rate decisions.”
House price expectations
Consumers’ expectations of future house price growth saw very little change in February, falling by 0.1 per cent to 3.4 per cent - 1 per cent higher than twelve months ago. The impact of higher interest rates is beginning to have some impact on housing demand and this will feed into lower house price growth as current and potential home owners evaluate their financial position before investing in bricks and mortar.
Nationwide MPC Forecast - Probability of a Base Rate Change
Rate Increase - 40 per cent
No Change - 60 per cent
Rate Decrease - 0 per cent
“The MPC is in a hawkish mood and in spite of some softer data, a rate rise cannot be ruled out.”
