Consumers bring boost to fragile UK economy: T. Rowe Price

Written by Tomasz Wieladek, chief European economist at T. Rowe Price

UK consumer confidence improved sharply in November, after the large fall in October. There are several reasons for this improvement.

First, interest rates across the whole yield curve declined significantly in November, resulting in the two-year mortgage rate falling below 5%. This provided relief from one of the biggest drags on consumer confidence. In addition, house prices grew by about 1% in October, while shares and general asset prices recovered as well. All of these factors likely supported an improvement in the financial outlook of consumers.

Real wages are now probably growing at 3% on the year, given the large fall in inflation in October. The persistence in wage growth suggests wages will continue to rise faster than inflation for several months. This rise in purchasing power supports an improvement in current and future purchases components of consumer confidence.

 
 

However, the index remains in deep negative territory, suggesting consumers remain under pressure. While wages are now rising above the rate of inflation, consumers lost significant purchasing power during the past 18 months. Purchasing power is still 3 percentage points lower than in 2021. Furthermore, an increasing amount of residential mortgages will need to be refinanced at much higher interest rates, reducing household disposable incomes and hitting consumer confidence.

The cold weather and some rise in gas prices will raise concerns about the potential for more inflation going forward. Also, the recent rise in geopolitical risk due to conflict in the Middle East will renew fears about higher oil prices, leading consumers to be more cautious with spending. 

Nevertheless, after the UK PMI yesterday, this is the second successive important survey showing an improvement in UK economic prospects. If these improvements continue, it is plausible the Bank of England was too pessimistic in its latest forecast of prolonged stagnation for the UK economy. Therefore, there is a risk markets have too many cuts priced in, especially when wage inflation remains at these elevated levels.

Related Articles

Sign up to the IFA Newsletter

Please enable JavaScript in your browser to complete this form.
Name

Trending Articles


IFA Talk logo

IFA Talk is our flagship podcast, that fits perfectly into your busy life, bringing the latest insight, analysis, news and interviews to you, wherever you are.

IFA Talk Podcast – listen to the latest episode