Consumer sentiment weakens as double dip looms

Swings in consumer confidence have often provided reliable evidence of short term turning points in economic activity. And there are growing fears of a double-dip recession for the UK with a raft of household surveys suggesting a weakening of sentiment about prospects for the economy.

As our chart above shows, people’s confidence about the overall state of the economy has dropped sharply over recent months. The worsening of expectations is probably the result of a combination of factors

* expectations of higher taxes including the rise in VAT to 20%
* the fall out from the recent budget and the expected cuts in public sector spending and employment
* evidence of a weakening in the housing market
* continued high inflation and pay rises lagging prices (causing real incomes to fall)
* worries about the future of private sector pension provision
* unemployment expectations have worsened
* very low interest rates for savers (the real return on saving is negative at the moment)

Given that domestic consumer spending accounts for over sixty per cent of GDP, a sustained weakness of consumer confidence will have a damaging effect of the British economy to sustain a recovery as we head in 2011.