The latest survey from market research firm Gfk, revealed a sharp decline in consumer confidence in September due to increasing concerns about rising fuel and food costs.
The Gfk consumer confidence index fell five points from August to -13, and marks the biggest decline since August 2020. This decline is significant because consumer confidence is inextricably linked to the levels of consumer consumption.
Consumer spending is the largest determinant of economic growth. If consumer confidence continues to be anaemic then economic growth will be lower than is currently anticipated
WIDESPREAD WEAKNESS ACROSS ALL MEASURES
All of the components used to create the index declined. These include the forecast for personal finances over the next 12 months that fell six points to 5, and critically expectations for the general economic situation for the next year, lost 10 points to -16.
According to Gfk consumers are increasingly concerned about rises in the cost of living. In particular the impact of fuel costs, and the marked increase in the cost of food are the predominant causes of consumer concerns. The former has been exacerbated by the recent surge in natural gas prices, and the latter by a shortage of labour, particularly HGV lorry drivers, as well as bottlenecks in the global supply chain.
WHY CONSUMER CONFIDENCE MATTTERS
There are five elements to economic growth in an open economy. These are Consumption, Investment, Government Spending, Exports and Imports. However by far the most important component in determining the level of economic growth is Consumption.
According to economic research Consumption accounts for between 65-68% of UK economic growth. Given the latest Gfk data, consumer confidence is falling in the UK. If this trend continues then economic growth will be lower than the Government, Bank of England and investment professionals are currently anticipating.
This has significant implications for both the equity market and fiscal and monetary policy in the forthcoming weeks and months.