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UK consumers defy MPC / consensus gloom

Posted on Friday, May 27, 2011 at 11:25AM by Registered CommenterSimon Ward | CommentsPost a Comment

The EU Commission UK consumer confidence index recovered strongly in May, supporting the suggestion of an improving consumer outlook in a post a month ago and a follow-up earlier this week. The index, which summarises consumer views on the economy, their own financial prospects, saving and unemployment, rose to its highest level since August, though remains below its long-run average (-14 versus -10).

Particularly notable was a large fall in the percentage of respondents expressing concern about the labour market, suggesting that the economy is continuing to create jobs and casting doubt on forecasts of a renewed rise in the official unemployment rate – see chart. Hiring expectations in the companion EU Commission business surveys are also consistent with rising employment.

As well as an improving labour market, consumer spirits may have been lifted by:

  • rising pay settlements – up by one percentage point in the first quarter from a year before, according to Incomes Data Services;

  • increased hopes that inflation is close to a peak – the percentage of consumers expecting faster price rises over the next year fell to its lowest since September;

  • improving fiscal trends (notwithstanding April's larger-than-expected deficit), implying a reduced risk of further large tax increases; and

  • banks' decision to cave in on payment protection insurance claims – redress awarded by the Financial Ombudsman Service to date has averaged £2,750 per claim while Which? estimates an aggregate pay-out of £7.9 billion.

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