Cautious UK Consumers Shows Risk of Starmer’s Gloomy Rhetoric
(Bloomberg) -- The biggest fall in UK consumer confidence in two-and-a-half years has renewed fears that Prime Minister Keir Starmer’s warnings about Labour’s economic inheritance could undercut his own growth goals.
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Research firm GfK said its monthly confidence index fell 7 points to minus 20 as households expected a far worse outlook for both their personal finances and the economy. The last time the index declined so steeply was in April 2022, when energy costs were spiraling in the wake of Russia’s invasion of Ukraine.
The downturn will reignite scrutiny of Starmer’s gloomy messages about UK finances since Labour took power in July, which have been interpreted by economists and policymakers as a prelude to tax rises in the October budget. Strong August retail sales figures released separately on Friday may only bolster the argument that the decline in confidence is a political problem rather than an economic one, given household sentiment appears to have been improving until politicians returned to the public eye after summer recess.
The plunge in confidence even appeared to catch out Bank of England Governor Andrew Bailey, who said hours before the GfK data release that he expected confidence to recover because household incomes are growing faster than inflation. “We’ve beaten the problems in those huge global shocks,” he said.
That was part of a day of messaging from the central bank about its gradual approach to easing rates. “It’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much,” Bailey said. But the confidence numbers will likely increase pressure on the BOE to go a bit faster.
Labour’s warning that things will get worse before they get better has resulted in “a bone-deep chill settling into the consumer psyche,” Danni Hewson, head of financial analysis at AJ Bell, said after the Gfk release. The Oct. 30 budget “needs to show the path to positivity isn’t completely riven with potholes.”
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Labour has a chance to shift the narrative at its annual party conference in Liverpool, where both Starmer and his Chancellor of the Exchequer, Rachel Reeves, will give major speeches. The premier is expected to pivot to a brighter tone and to set out the long-term gains he expects after the immediate pain.
There are positives for them to talk about. The economy has been stronger than expected this year, with the best growth of all G7 major advanced economies in the first six months. Thomas Pugh, economist at RSM UK, said there is also pent-up spending in the household sector as savings rates are high, though he warned that “consumers need to feel confident enough to start spending” and Starmer’s “talk of a ‘painful’ budget clearly hasn’t helped that.”
Set against that, the government has repeatedly accused the Conservatives of leaving behind the worst inheritance since World War II, including £22 billion ($29.2 billion) of unfunded and undisclosed spending commitments. Reeves has already scrapped winter fuel payments for about 10 million pensioners, and warned of more pain to come.
The pressure on Reeves to deliver a belt-tightening budget was underscored by separate figures Friday showing government borrowing is significantly overshooting official forecasts, while the national debt hit 100% of GDP last month for the first time since 1961.
Labour’s warnings risk backfiring, according to Andy Haldane, a former BOE chief economist who is now chief executive of the Royal Society of Arts. They “generated a fear and foreboding and uncertainty among consumers, businesses and investors,” he said in a television interview last week.
The GfK data backs that up. Household confidence is an important barometer for growth as consumer spending accounts for two thirds of UK output.
“Following the withdrawal of the winter fuel payments, and clear warnings of further difficult decisions to come on tax, spending and welfare, consumers are nervously awaiting the Budget decisions on Oct 30,” said Neil Bellamy, consumer insights director at GfK.
GfK said its major purchase index fell 10 points to minus 23, suggesting people will wait before buying big-ticket items like sofas. Respondents to the survey also grew more gloomy about their personal finances for the year ahead, with the index dropping 9 points into negative territory. Sentiment about the general economic situation over the coming year plummeted 12 points to minus 27.
“These three measures are key forward-looking indicators so, despite stable inflation and the prospect of further cuts in the base interest rate, this is not encouraging news for the UK’s new government,” Bellamy said.
--With assistance from Andrew Atkinson.
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