Week 17, 2011: Consumer Confidence

Summary: UK GDP figures released this week show a deceptive 0.5% increase, but consumer confidence tells the real story.

What does the chart show? The blue line shows an index of consumer confidence, measured by market research firm GfK NOP. A survey is carried out among a representative sample of the UK population, aimed at capturing the general mood of consumers. This index contains a combination of questions, including personal financial situation, perception of the general economic situation, and whether the climate is right for major purchases (more information can be found here). A low number indicates widespread pessimism on the economy, whereas a high number would indicate optimism about the future.

The dotted red line shows the average over the three year period shown by the chart.

Why is the chart interesting? Consumer confidence is a good indicator of the future performance of the economy. If confidence is low, people are less likely to spend their money on goods and services. It is particularly relevant this week, as quarterly GDP figures released show a 0.5% increase on the last quarter of 2010, when adverse weather conditions led to a 0.5% decrease on the previous quarter. The ONS have released a helpful video showing why this means there has been no growth over the past 6 months. Low consumer confidence suggests that growth will continue to be at best sluggish for the time being.

As you can see from the chart, Ed Milliband was wrong to suggest yesterday that consumer confidence was at an all-time low, but the outlook is certainly not good for the immediate future. According to GfK NOP, there are only two previous periods on record when consumer confidence dropped below the -30 point - "early 1990 and mid 2008" - and neither make for good comparisons.