British consumer sentiment has soured markedly this February, with households retreating from significant spending and growing more pessimistic about their financial futures, despite a cooling inflation rate. The latest data from GfK’s Consumer Confidence Index shows a three-point fall to minus 19, a level not seen since last November, delivering a blow to retailers hoping for a sustained recovery.
A Broad Decline in Financial Outlook
The deterioration was primarily fuelled by a sharp drop in how people view their own wallets. According to GfK, perceptions of personal finances over the past year and expectations for the next 12 months both fell by four points. Mirroring this caution, confidence in making large, “big-ticket” purchases also weakened, with the major purchase index falling four points to minus 14.
In a stark reflection of the prevailing economic mood, expectations for the general economy over the coming year remained stuck at minus 31, identical to the score from a year ago. A separate measure tracking the inclination to save money, which is recorded but not included in the main index, plummeted seven points to 21, now nine points lower than this time last year. The GfK barometer is based on a survey of 2,003 individuals aged 16 and over conducted between the 1st and 15th of February.
The Confounding Economic Backdrop
This slump in confidence comes against a complex economic backdrop. While the headline rate of inflation, as measured by the Consumer Prices Index (CPI), eased to 3.4% in February, prices continue to rise. The Bank of England has projected inflation will fall temporarily to its 2% target in the second quarter of this year before increasing again later in 2024, having held its key interest rate at 5.25% in January.
Concurrently, the labour market is showing signs of strain. The unemployment rate has risen, reaching 4.2% in February—its highest level in nearly five years—up from 3.9% previously, according to Office for National Statistics (ONS) data. Economists link this to the cooling effects of higher interest rates, leading to more redundancies and caution among employers. While regular pay growth, excluding bonuses, was a stronger-than-expected 6% in the three months to February, it has dipped from 6.1% and overall wage growth remains weak.
This environment is directly shaping consumer behaviour. Retail sales volumes were completely flat (0.0%) in February following a strong January, with growth in clothing and department stores offset by falls in food and fuel. Over the three months to February, sales volumes fell by 0.4% compared to the previous quarter. Barclays data indicates overall consumer card spending growth slowed to 1.6% year-on-year in 2024 from 4.1% in 2023, as people limited outlays on food and major items.
Neil Bellamy, consumer insights director at GfK, stated that fewer people now consider it a good time for major purchases and fewer intend to save. “Although the rate of inflation is easing, prices continue to rise, forcing many households to prioritise day-to-day spending over longer-term needs,” he said. He highlighted that rising unemployment and weak wage growth are heightening job security fears, particularly for those on lower incomes, and risk undermining the typically more optimistic outlook of younger age groups.
Longer-Term Strains and Contradictory Signals
The pressure on household budgets is influencing longer-term financial health. The household savings ratio reached 11.3% in the first quarter of 2024, the highest since mid-2021, yet an estimated 39% of individuals are under-saving for retirement. This caution is evident in spending habits, with consumers exhibiting a “lipstick effect”—opting for small, affordable luxuries while cutting back on larger expenditures. Research suggests two-thirds of consumers would save any extra funds if essential costs eased, with less than 10% saying they would spend more on discounted goods or shop at lower-cost retailers.
The broader economic picture remains constrained. The UK economy is forecast to grow by just 0.9% in 2024, a downgrade attributed partly to lower household savings offering less scope for consumer-led expansion. This domestic decline contrasts with a global consumer confidence index, reported by Ipsos, which showed little movement in February, though it scored Great Britain at 51.5. Official employment data presents a nuanced picture; while the ONS reported a February unemployment rate of 3.8% with a 75.0% employment rate in one release, a subsequent report confirmed the rate had increased to 4.2%.
