Consumers wary of times head

This fall continues the downward trend seen over the last three months. Consequently, Nationwide forecasts a 90% probability that Base Rate will remain unchanged.

The effects of the five interest rate rises in the 10 months to August 2004 are still being felt and the subsequent slowing of house price inflation has left consumers feeling more cautious. House price inflation is now running at a 3 month average of 0.2% - it was 1.7% twelve months ago. This month’s Nationwide research shows that consumers expect house prices to rise by 1.7% over the next 6 months – down from 2.7% last month.

Consumers are saying that they are feeling increasingly uncertain about the future. In April, consumers paid back £40 million more on their credit cards than they spent, the first time since May 1994 that overall borrowing on credit cards has fallen. This has led to more difficult conditions on the high street. In May, underlying retail sales fell again following warnings of tough trading conditions from M&S, Boots and other retailers.

Nationwide research suggests that this more cautious consumer behaviour is likely to continue. It shows that the number of people looking to decrease their level of debt in 6 months time has risen by 3 percentage points from last month to 45%, while the number of those looking to increase their level of debt fell by 2 percentage points to 9%.

Four out of the seven indicators of consumer confidence tracked by Nationwide showed a fall in May. These figures show that consumers are more confident about the present, but less confident about the future. The indicators refer to the balance of positive and negative responses.

Future Indicators:

Economic Outlook in 6 months: confidence fell by 9 percentage points

Employment Prospects in 6 months: confidence fell by 9 percentage points

Household Income Outlook in 6 months time: confidence fell by 2 percentage points

Spending Indicators:

Spending Confidence – major purchase: confidence fell by 4 percentage points

Spending Confidence – household purchase: confidence unchanged from last month

Current Indicators:

Current UK Economic Situation: confidence rose by 6 percentage points

Current UK Employment Situation: confidence rose by 3 percentage points

While consumers are confident at the moment, they are increasingly uncertain about the future. This month net confidence in the current state of the economy stands at +37, while confidence in the economic outlook in 6 months stands at -10%, a gap of 47 percentage points compared to 32 last month. This pattern was repeated with confidence in employment prospects. It could well be that bad news about the economy has caused confidence in the future to fall. Simultaneously, uncertainty surrounding the election and a possible rise in interest rates, which had been hitting confidence, has subsided causing a recovery in current indicators.

Commenting on the figures Stuart Bernau, Nationwide's executive director, said: "There’s been a noticeable change of sentiment on the economy this month and people now seem to feel much more uncertain about the future. With house prices cooling, consumers seem to be feeling less optimistic, tightening their belts and looking to reduce their debts rather than spend on the high street. People seem particularly uncertain about the future of the economy, jobs and income and it could be that the next couple of months are critical to the future direction of the economy."