The Index, in partnership with TNS measures the population's view of the current position of, and future prospects for, the UK. It takes into account the general economic situation, employment conditions and personal expectations.
Stuart Bernau, Nationwide executive director, said: “The Index shows that consumer confidence rebounded in July following steep falls in May and June. It appears that fears about a downturn that existed in recent months have lessened. The prospect of an interest rate cut may also have aided the rebound in sentiment.
“The recovery in sentiment occurred despite the terrorist activities seen in July, which had the potential to dampen confidence.”
Discussions at the last MPC meeting in July led to the closest vote since October 2003 at 5-4. Since then concerns about potential inflationary pressures resulting from better than expected retail sales data have been largely outweighed by weak estimates of second quarter GDP. An August rate cut is likely.
In July, four of the five components that make up the Index rose. Of these, the Current Employment Situation and Employment Outlook saw the biggest rises – the balance of people feeling positive about each measure rose by 8% and 7% respectively. The one measure to fall, Household Income Outlook, only fell by 1%.
Overall, the index shows that consumer confidence improved in July following successive falls in May and June. The Index now stands at 101 (May 2004=100), up from 95 the previous month.
The rebound in July can largely be attributed to recent fears about the economy not having been realised and the labour market remaining strong. In addition, there has been some recent positive data such as stronger than expected retail sales and some pick-up in housing market activity.
However, there is continuing economic uncertainty - reflected in the close MPC vote last month – which indicates that consumer confidence may continue to change.
Looking back over the first 4 months of the year, the index plateaued at a 12 month high ranging between 108 and 110. It then fell in May and June before July’s rebound.
The fall in confidence in May and June was driven by consumers adopting a more pessimistic outlook –highlighted by the Expectations Index – whilst confidence in the Present Situation was more stable.
At that time, there were concerns over a possible house price crash, retail sales were downbeat and interest rate speculation concerned a possible rise. Consequently, consumers were wary about the outlook for the economy, employment and income.
However, as fears have lessened, some of this fall has been reversed in July.
It was also noted by the MPC in July that House price inflation affected consumer spending. This is because when house price inflation slows, consumers tend to feel more cautious in their spending decisions. The reduction in annual house price growth from more than 20% a year ago to 2.6% now, makes consumers’ expectations particularly relevant.
In July, consumers forecast house price growth of 2.0% in the next six months. This is slightly up from 1.5% the previous month and suggests consumers generally believe that house prices have broadly stabilised and have entered a period of slow growth.
It appears that the fears of a crash expressed by some a few months ago have not been realised and consumers now believe that the housing market is gently cooling.
In addition to the main Nationwide Consumer Confidence Index, the Society has tracked three other indices: Present Situation Index, Expectations Index and Spending Index. All three rose in July reflecting a positive shift in consumer sentiment.
Present Situation Index: rose from 100 to 104. The index monitored consumers' views of the current economic and employment situation.
Expectations Index rose from 91 to 99. The index checked consumers' views of the economic and employment situation.
Spending Index rose from 108 to 113. The index monitors consumers' views of whether this is a good time to make a major purchase, such as a house or car, or household goods.
Highlights
- Consumer sentiment rose in July following sharp falls in May and June
- The Nationwide Consumer Confidence Index rose to 101 in July from 95 in June
- Fears about the economy in recent months have not been realised and pessimism has evaporated
- July’s terrorist bombings have not dented confidence
- Nationwide forecasts a 90% probability that the Bank of England will cut rates on Thursday
