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Gloomy consumers put big purchase on hold

Nationwide Building Society report shows decline in confidence even before riots and market upheaval

UK consumers are putting spending on big ticket items on hold as they grow gloomier about the outlook for the economy and their own finances. A report released by the Nationwide Building Society on Thursday showed that Britons were feeling more pessimistic even before the effects of the riots and the financial turbulence.

In its monthly health check of consumer sentiment, Nationwide found that confidence had slipped back to the levels seen at the start of the year and that there was little prospect of improvement in the rest of 2011.

Robert Gardner, Nationwide’s chief economist, said: “There was a small dip in consumer confidence in July, reflecting increased uncertainty around the outlook for the UK economy. At 49 points, the main confidence index remains well below its long-run average reading of 79.”

Consumers have been hit this year by a combination of tax increases, weak wage growth and higher energy bills. Official figures released in July showed that economic activity expanded by 0.2% in the second quarter of 2011 and was 0.7% up the second quarter of 2010.

“With the economic recovery still facing strong headwinds it is unlikely that we will see any considerable improvement in confidence in the remainder of 2011,” Gardner said.

“Indeed, it may be that we see a further deterioration in August, following riots in a number of UK cities and the sharp declines seen in stock markets around the world. Overall, conditions for the UK economy remain challenging, especially for consumers.”

The survey found more than half those questioned believed it was a bad time for a big purchase such as a house or a car. With the exception of the short-lived burst of spending around the time of the royal wedding in the spring, the Nationwide said 2011 had seen consumers becoming gradually more cautious. Gardner said the sharp increase in the cost of essentials – food and energy – over the past year appeared to be deterring some consumers from discretionary spending on household goods.

The drop in consumer sentiment followed a gloomy report from Germany on the state of business confidence. The closely-watched IFO survey dropped from 112.9 in July to 108.7 in August – a much bigger drop than financial markets had expected and the sharpest decline since the economy was deep in recession in late 2008.

The IFO report followed an equally downbeat survey from ZEW on Tuesday. Chris Williamson, economist at Markit, said the picture was one of “rapidly deteriorating business and household confidence in Germany. Worries have intensified in recent weeks as economic data have shown growth faltering, financial markets have slumped and policymakers appear unable to resolve the region’s financial crisis.

“The data also add to the prospect of the German economy stagnating in the third quarter, or even sliding back into contraction, having grown just 0.1% in the second quarter. With data like these, it seems very likely that the ECB will soon need to reverse the two rate hikes that we saw earlier this year.”

The run of poor data from the United States came to an end on Wednesday with news of a 4% jump in durable goods orders in July, helped by a jump of 43% in commercial aircraft orders and a rise of 11.5% in vehicle orders. The increase was a more modest 0.7% once orders for the transport sector were excluded, but analysts said the July pick-up suggested investment in the US would be strong enough in the third quarter to prevent growth from stalling. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds