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Low consumer confidence raises chance of double-dip recession

Written by on 6 August, 2010

Britons’ fears over the state of the economy are increasing the chance of a double-dip recession as month by month consumer confidence dwindles to recession levels, according to research from GfK NOP on behalf of the European Commission.

The Consumer Confidence index has fallen for the fifth month in a row, July figures reveal. Falling by three points to –22, it is the lowest reading of the overall figure since August 2009 when the recession was still taking a hold of the UK.

This was also the first chance for consumers to voice their opinions on the emergency Budget the Government held in June and the changes that have been put in place which will affect them in coming months. The researchers believe this may have had an effect on the results and would explain the gloomy figures — but if it’s more than just a response to the Budget, it could mean bad news for the year ahead. Consumer confidence measures have been shown to be a fairly clear indicator of what is to happen in the economy; they are often a reliable prediction of what is to come, which in this case could spell a double-dip recession as previously feared.

Three of the five measures in the annual survey have dropped in the past month, while one has remained the same and the last has increased. Key points that consumers have demonstrated they have less confidence in this month are their personal financial situation over the next year, confidence in the ‘general economy’ over the past twelve months and their confidence in the economy for the next twelve months.

Particularly notable was the drop in confidence for the general economy over the next twelve months — the figure decreased by seventeen points from last year to a low of –25. These results suggest that hope of a consumer-led recovery from the recession may be quashed.

The forecast for personal finances over the next twelve months has decreased by four points to –6, which is six points lower than July 2009. However, the index measuring changes in personal finance situations during the last year has remained at –14, the same as June.

One figure which did rise (despite still being negative) was the major purchase index, which now stands at –16; the measure, of whether now is a good time to make major purchases, shows that consumers may be thinking about getting their higher priced items now before the VAT increases to 20%, or that they are aware of the current bargains in the retail sector after a hard recession.

Despite the low rates that banks are continuing, the savings index — which measures whether consumers believe now is a good time to save — has increased two points to –2, which is a positive 10 points higher than this time last year.

Though the economy grew by 1.1 per cent in the second quarter, economists are predicting a weaker second half to the year, with the outlook of high inflation, growing unemployment levels and low growth for the rest of 2010 and possibly for 2011. This could potentially lead to a second recession, experts warn. The reduced public sector spending and the increase in taxes set out by the Government together with these factors make for an overwhelming lack of confidence in Britain’s consumers. The survey was conducted amongst a sample of 2000 individuals aged 16 and over in July, and the study has been annually reported since 1974. It was also backed by an additional report from the European Commission, which found that the consumer confidence index for the UK dropped for the fifth month in a row to a 13 month low of –17 in July.

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