THE BLOG

Consumers Cutting Back Less, But Remain Cautious

07/08/2014 13:10 BST | Updated 07/10/2014 10:59 BST

As with other recent data releases, the latest data from the Which? Consumer Insight Tracker shows headline measures of consumer confidence have either plateaued or fallen in the last two months. Just 25% of consumers think their personal finances will improve in the coming year and positive sentiment over the future of the economy overall is now four percentage points below the post-recession peak of 40% last seen in April 2014.

Given the previous upward trajectory, this has come as somewhat of a surprise. It is also in contrast to broader measures of consumer behaviour. For instance, Which? data also shows that consumers continue to be less likely to be planning to cut back spending across a wide range of areas.

One of the areas to see the biggest falls in proportions of consumers cutting back is holiday spending. This time last year, over half (53%) of consumers said they would be cutting back on holiday spending in the coming months. That figure now stands 15 percentage points lower at 38%.

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Other areas have also seen significant improvements. Entertainment, "big ticket items", savings and investments and groceries and food have all seen double digit falls in the proportion cutting back. These intentions also match well with ONS consumer trends data, which shows consumers are buying more than a year ago, with notable increases in volume spend on transport, recreation and restaurants/hotels.

So what can explain this mismatch between consumer confidence in the economy and their own finances and spending intentions? To understand this we need to dip below the headline figures to assess broader measures of confidence. Two key areas are expectations of price rises and views about the future of unemployment. Just a year ago, net expectations of unemployment stood at -37%. That means that out of a hundred people, 37 more people thought that unemployment would rise than thought it would fall. Today, opinions are more evenly split - with a net balance of just -3%.

In short, consumer expectations about the future of the labour market are more closely matching the underlying data and predictions of economists. Expectations over price rises have also moderated, with the proportion of consumers thinking that prices will increase "a lot", nearly halving in the past year.

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Finally, while the proportion of consumers expecting their personal finances to improve has not increased in the last year, the proportion expecting them to get worse has dropped significantly - falling 11 percentage points to stand at 22% in July 2014.

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All of this paints a mixed picture of confidence. On the positive side, consumers are starting to see more positive signs in the UK economy - unemployment falling, price rises relatively stable and the threat of renewed recession dissipating. But with the backdrop of the financial crisis still fresh in their minds, it is not surprising that consumers remain cautious about the future.