UK consumer confidence fell sharply in January

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UK consumer confidence fell to its lowest level in more than a year in January as rising government borrowing costs and warnings of job cuts took a toll on economic sentiment.

GfK’s consumer confidence index – how people view their personal finances and broader economic prospects – fell 5 points to 22, the lowest reading since late 2023, according to new data.

Consumer confidence gives a look to household spending ahead – a gloomy mood means people are more likely to save more than make significant purchases. Households have built up substantial savings over the past year, limiting the recovery in spending, although wage growth will likely outpace inflation in 2024.

It was the biggest month-on-month fall in GfK’s consumer confidence index since September 2024, with consumers worried about a possible tax hike in the October budget.

Neil Bellamy, director of consumer insights at NIQ GfK, pointed out that he was particularly optimistic about the wider UK economy. “These figures show that consumers are losing confidence in the UK’s economic prospects,” he said.

The survey was carried out in the first half of January, when the UK’s 10-year borrowing cost reached its highest level since the financial crisis, threatening the government’s ability to meet the budget and further tax hikes.

Borrowing costs eased following a sudden drop in UK inflation in December, but remained higher than in the autumn.

Business surveys in early January also boosted employment forecasts, partly due to an upcoming increase in employer national insurance contributions that will take effect in April.

Confidence was 18 points lower than economists polled by Reuters, but in line with expectations from Eli Henderson, economist at investment bank Investec.

Henderson said news of rising borrowing costs and possible job losses “had an impact on the outlook and expectations about the economy and household finances”.

Consumers are “very worried about job prospects,” said Thomas Willadek, chief European economist at investment firm T Rowe Price.

The GFK savings index, which is not included in the overall confidence index calculation, rose 9 points to 30. Bellamy called the increase “unwanted” because it shows households are bracing for tough economic times by prioritizing savings over spending.

The UK household savings ratio, the amount of disposable income, was 10.1 per cent in the three months to September, higher than the 2016-2019 average of 5.5, according to official statistics. Although real wages rose for more than a year and a half, household consumption per capita remained 2.2 percent below pre-pandemic Q4 2019 levels.

But Henderson argued that as confidence recovers, double-digit savings rates and healthy wage growth could reverse consumption.

“If confidence is to increase, consumers generally have the means to release higher levels of consumption,” Henderson said. “That confidence will return soon, but not with much certainty,” she added.

Nationally, separate data published on Friday showed that housing affordability improved. While remaining above the long-term average, the price-to-earnings ratio for first-time buyers fell to 5.8 at the end of last year from a peak of 5.8 in 2022. Similarly, mortgage payments for first-time buyers have dropped to 36%. By the end of 2023, 38 percent of their maximum take-home pay percentage.