Chart of the month - diverging trends in UK and eurozone consumer confidence
Following a plunge in UK consumer confidence and a 16-year high in the Eurozone Consumer Confidence Index, Janet Mui looks at the reasons for the divergence.
A brief summary
- UK GfK Consumer Confidence Index plummeted in July following the snap General Election.
- Weaker consumer confidence, potential tightening in credit conditions and slower real wage growth put downside risk on UK consumer spending.
- In a sharp contrast to the developments in the UK, eurozone consumer confidence soared to a 16-year high with the current recovery looking more sustainable.
UK consumers have been hit by a series of shocks during the past year. In the immediate aftermath of the Brexit vote, consumer confidence plummeted and uncertainty soared. Confidence did partially recover as the economy proved more resilient than widely predicted. However, consumers remained nervous, partly due to the surge in inflation and ongoing Brexit uncertainty. The narrowing in the Conservative party’s majority following the snap general election injected further uncertainty into the consumer economy, as evidenced by the plunge in “Major Purchase Index” in GfK’s July consumer confidence survey.
The disappointing GfK consumer report added further concern about the financial health of UK consumers who have been facing slower nominal wage growth and higher inflation. Given that household spending is a crucial part of aggregate demand, this increased concern about the overall growth momentum of the economy. At the same time, it is evident that the Bank of England is focusing more heavily on the rapid growth in consumer credit. This has raised the possibility that some tightening in credit conditions may emerge in the second half of the year or early in 2018. This will present further downside risk to consumer spending.
In a sharp contrast to the developments in the UK, consumer confidence in Germany rose to a new record high in July. The Index has remained strong over the past year thanks to the positive impact on employment from the continued expansion in output. Confidence has been further buoyed by the easing in political risk and a stream of upbeat economic data. Encouragingly, the surge in consumer confidence was not confined to Germany, as the overall Eurozone Index soared to a 16-year high in June. One interesting aspect of this improvement was an increase in confidence amongst French consumers, as the sweeping victory of Emmanuel Macron in the presidential and parliamentary elections raised hopes for reform and for the creation of a more pro-business environment.
With rising confidence underlying the positive momentum in eurozone growth, both the demand for, and supply of credit are likely to improve, leading to a more sustainable and widespread recovery.
Janet Mui, CFA is the global economist at Cazenove Capital, the wealth management division of Schroders. Janet is responsible for the formulation and communication of Cazenove’s top-down views. She is a member of the investment committee that oversees strategic and tactical asset allocation at Cazenove. Janet is also the macro spokesperson and a regular commentator at major media outlets including the BBC, Bloomberg and CNBC.
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