Unraveling the UK's Economic Confidence Conundrum: A Political Twist
The UK economy is a complex beast, and understanding its current state and future prospects can be a challenging task. But one measure stands out as a powerful indicator of the nation's economic confidence: consumer confidence.
This isn't just about feeling good or bad; it's a long-standing survey that puts the UK on an economic psychiatric couch. It asks the crucial question: How do you feel about the economy's prospects? And it's not just a feel-good factor; it has real-world implications for major purchases and personal finances.
The GfK Consumer Confidence Barometer has been consistently tracking these sentiments for over five decades. It's an imperfect science, but the basic idea is simple: optimism minus pessimism equals net confidence.
Historically, this metric has been a reliable predictor of political fortunes. Remember the famous phrase, 'It's the Economy, Stupid'?
But something has shifted. The latest data reveals a fascinating and potentially controversial trend.
The chart below shows the headline net confidence number broken down by age cohort. Traditionally, these groups moved in lockstep, but now they're diverging.
Younger people initially had a more optimistic outlook, but this dimmed as they aged. Still, all age groups reacted similarly to events like Brexit and the pandemic. However, the Liz Truss mini-budget in 2022 hit everyone hard, causing a collective loss of confidence in the government and economic prospects.
Until 2024, the lines remained aligned. But then something remarkable happened.
The under-50s' confidence surged, and the under-30s reached confidence levels not seen since Brexit. Yet, the over-50s and pensioners experienced a collapse in economic confidence, mirroring the Truss-era lows.
This age-related break is intriguing. A possible explanation lies in the political economy.
The causal flow has reversed: how you feel about your finances now influences your political choices. Young people, generally on the liberal left, are happier after enduring crises, and they voted for the government in 2024. Older voters, predominantly Conservative and Reform, are unhappy and unconvinced, feeling the country has taken a turn for the worse.
Social media algorithms might be a factor. The Mad Max-style dystopia presented on these platforms could be influencing this demographic's negative outlook. There's also evidence from the US, where political sentiment taints economic confidence.
During the transition between the Trump and Biden administrations, Democrats' economic confidence soared, while Republicans' plummeted. The Biden administration called this a 'Vibecession,' a sense of economic malaise not reflected in data.
Economic factors play a role, too. The Bank of England's rate cuts benefit young home seekers and jobseekers but hurt older savers. This could explain the unusually high UK savings rate, a pandemic-era anomaly.
Older Britain is sitting on its savings, despondent about the economy, and refusing to spend, dragging down GDP. Yet, worker pay rises remain higher than inflation.
The early financial results from businesses are intriguing. Despite gloom, many retail results are strong. Some bosses complaining about National Insurance rises report healthy sales and profits, suggesting the tax has been offset.
Pub chains like Mitchells & Butlers and Fullers had strong festive seasons, with like-for-like growth.
Challenges remain with price rises, but inflation is heading towards the 2% target. The government is consciously limiting regulated price increases for rail and water.
More rate cuts are on the horizon, and the impact of previous cuts will boost the housing market and household spending.
The government aims to end a tumultuous 2025 with an investment boom, exemplified by recent Heathrow and northern train line announcements.
But will people's politically charged perceptions of economic confidence be a brake on this optimism? The UK's economic confidence conundrum is far from resolved, and the political implications are profound.
