Spending Power sees short term confidence but long term cautiousness
22 June 2015
- Attitudes towards current personal finances shoot up in the month after the election.
- With low levels of inflation, wage growth showing signs of strengthening and unemployment continuing to fall, the short term view for many is increasingly positive.
- However, longer term confidence in the future situation falls for the third consecutive month to its lowest level since August 2013.
The latest Lloyds Bank Spending Power Report shows consumer confidence towards the value of the pound in the pocket has continued to rise.
Contrary to last month where almost every aspect of the Current Situation dropped, this month, the surprise political certainty created by the result of the General Election has potentially contributed to a boost in sentiment. Each aspect of the Current Situation has improved, showing people surveyed are feeling more positive in the short term. This has created a jump in the Current Situation Index by 11 points, resulting in another rise in the Overall Index to a new high of 160. [Chart 1]
The Current Situation Index has reached a new all time high of 213, with people’s sentiment towards their personal financial situation improving by 3 percentage points (pp) since April, and their household financial situation increasing by 4pp. Sentiment towards the country’s employment outlook improved by 8pp, possibly driven by the unemployment rate continuing to fall to 5.5%. At the same time, the consumer research shows the proportion of people with disposable income remained stable at 78%.
In April, the Consumer Price Index (CPI), the main measure of inflation, turned negative for the first time since 1960, and wage growth was showing further signs of strengthening. Although inflation rose slightly to 0.1% in May, both of these have contributed towards strengthening of household spending power.
Claire Garrod, Head of Personal Current Accounts at Lloyds Bank, said: “Short term spending power confidence has surged in May with less uncertainty after the election, low levels of inflation and strengthening wage growth. These factors are contributing to people feeling like their money is going further this month than last. However, confidence towards finances in the longer term has recently fallen, suggesting that people retain a cautious view of the future.”
Lloyds Banking Group economic data shows that May saw a further fall in essential spending of -0.9% overall, with growth continuing to be held down by lower spend on gas and electricity (-6.9%) and fuel (-7.5%), compared to 12 months earlier. However, with prices at the pumps rising, the slowing of falling spend on fuel observed over the last couple of months has continued into May.
This is also reflected in the consumer research which shows rising fuel prices are beginning to be felt by consumers. The proportion of those that say they are spending more on fuel has increased month-on-month over the past five months from 16% in January 2015 to 24% in May.
The Future Situation Index (the measure of confidence towards finances in six months time) has fallen for a third consecutive month, dropping by 1 point in May. Although the dip is small this month, it is now at its lowest level since August 2013. Compared to November 2014, when the Index was at its highest, fewer people now expect to be able to save more, pay off more debt and have more discretionary income in six months time.
Despite the slight decline in the Future Situation Index, the strength of the Current Situation Index has driven the Overall Index to a new high of 160.
Patrick Foley, Chief Economist at Lloyds Bank, said: ““While households continue to have an upbeat view of their current financial situation, confidence in the outlook continues to drift down. But with wage growth now strengthening, households are likely to develop a more positive view of the future, and this should allow the UK’s recovery to make further headway in the second half of the year.”