Caught in a Trap
How do you feel?
|Click to download as PDF|
Sentiment is really important to the economy - and its housing markets - because it affects people’s behaviour. When everything is good and people and businesses feel confident, they spend more money, buy and sell houses or invest more in their products, factories and workforce. That leads to more production, more jobs, higher wages and consequently helps the economy to grow. But when confidence disappears things can go into reverse.
Consumer confidence is particularly important because consumption makes up around 60% of the economy. Changes in consumer behaviour therefore, have a big effect on economic growth. Looking at consumer confidence data can give us advance warning of likely changes in economic growth – and housing market sentiment too as changes in consumer confidence tend to be reflected in housing market activity about six months later.
|Click to enlarge.|
The trend in consumer confidence has been falling since its peak in mid-2015, although it remains just above its long-term average. That helps to explain why consumption over the summer was so resilient. But since October the softening has gathered pace and is now reflected in consumers’ spending behaviour as higher prices of imported goods, affect food and transport costs and hit households’ pockets. That has affected retail sales, which saw the first fall since December 2013.
The Chancellor is coming up to his next budget on 8th March and will be keeping a close eye on confidence. He is committed to keeping public sector spending under control and may have to raise some tax, but with confidence already wavering he would be wise to steer clear of squeezing households any more.