Beware the cracks appearing in British consumer sentiment

February 26, 2016

GfK consumer confidence

A slight tremor rumbled through a key pillar of British economic growth – household spending – as consumer confidence slipped this month to its lowest level since December 2014.

While data this year suggest Britons have largely shrugged off bad news from the global economy, as well as any uncertainty around Britain’s membership of the European Union ahead of June’s referendum, Friday’s disappointing GfK consumer confidence figures might cause a pang of worry for economic policymakers.

GfK’s balance of consumer confidence fell to zero in February from +4. While zero still represents a pretty strong reading in terms of the history of the survey, its measure of economic optimism didn’t bode well, falling to its lowest since June 2013.

Why does this matter? While more volatile, the economic optimism index has been a decent gauge over the last 10 years of where the headline consumer confidence heads a couple of months later.

It hardly needs saying that consumer spending is crucial for British economic growth. GDP figures earlier this week confirmed that household spending was by far the biggest contributor to economic growth on the expenditure side in 2015, dwarfing both business investment and government consumption, and easily offsetting a drag from trade.

“One big question at the moment is whether the dark clouds surrounding the global outlook are starting to influence spending decisions. There has been little evidence of that in the UK data through to January. But the February confidence figures show some cracks appearing,” said Allan Monks, economist at JPMorgan.

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