Falling UK Consumer Sentiment Predicts Spending Downturn

Autumn 2022

Since October 2018, when we launched the Index of Consumer Sentiment, we’ve been tracking UK consumer sentiment every quarter. In this article we take a look at the latest findings, reflect on what we’ve learned, and look forward to further improvements to the insight we’re able to gain through the Index. In particular, we show that ICS allows us to predict ONS consumer spending data, and reveal how confidence varies widely by customer demographics.

Better than expected?

First, let’s have a look at where the Index stands, and how it’s fluctuated over the four years it has been running. The outbreak of the pandemic led to the single largest drop in the Index that we’ve ever seen, between Q1 and Q2 2020, but that fall was nearly replicated between Q1 and Q2 this year as the cost of living crisis really started to bite.

The latest score, 57.4 for Q3 2022, shows that consumers have not yet started to recover their financial confidence, but in some respects this is actually a better result than many expected. Consumer confidence may not be recovering, but overall it does seem to have stopped falling.

US & UK consumer confidence lagging the EU

We chose a methodology for the ICS to reflect the long-established measures used by the University of Michigan in the USA. That means we can treat the movement of the indices in the UK and the USA as very much a like-for-like comparison. On that basis, US consumer sentiment has declined much more sharply since 2018 (from a much higher starting point), and now lags the UK for only the second time since we started measuring.

We don’t have an exact comparison for the EU, but the nearest comparable measure (the ESI) suggests that EU consumers are still much more optimistic than their UK and US counterparts.

The most confident consumers are younger, richer, men

From the start we have seen some significant differences in consumer confidence between different types of people, and as we learn more we’re adding extra questions into the analysis so that we can understand how sentiment varies by demographics.

We can say, for instance:

  • Men tend to score higher than women [1]. This gap has been growing until this quarter, but has narrowed in Q2 2022 as women’s confidence has increased while men’s has continued to decrease.

  • It’s people 45+ who are really feeling the cost of living squeeze. Their scores have clearly diverged from those under 45 in the last two quarters, and are continuing to trend downward.

  • Household income correlates strongly with confidence. The people whose confidence is most improved are those earning £40,000 to £59,999. There is now a big gap between those whose household income is below £40,000, and those who are above that threshold.

  • People who have attained a Postgraduate qualification are significantly more confident than others.

How sentiment links to behaviour

The reason consumer sentiment matters is that it drives the decisions consumers make every day about how to spend (or save) their money. This time we’ve taken data from the ONS on household spending  and plotted it against ICS. The correlation is very clear, though so far based

on only 14 quarters of matched data. Using this correlation we can forecast household spending figures for Q2 and Q3 2022, and we’ll continue to monitor these to refine the performance of the prediction.

What next for the Index of Consumer Sentiment?

As time goes by we’re learning to trust the Index of Consumer Sentiment more and more. It links strongly to consumer behaviour, and is something that anyone whose strategy depends on the confidence of the UK consumer needs to know about.

We’ve seen that consumers can react very quickly to economic shocks, but also that they are able to distinguish between present pain and a gloomy outlook for the future, at both an individual and an economic level. The devil, as we reveal in each quarter’s report, is in the detail. Keep an eye on tlfresearch.com  to read each report as it comes out.

We’re always looking to add more to the analysis so that the index is as useful and informative as it can be. We’ve built up a picture of the ways in which demographics and confidence correlate, and we’ll track and refine this as we go forward. Let us know if there’s anything you think we’ve missed.

Finally, each quarter we’ll add questions that help us to understand how the index ties in with consumer attitudes and behaviours that seem topical at the time. In Q3’s report, for instance, we’ve asked customers about how the cost of living crisis has affected their spending and saving habits.

Have you found the Index of Consumer Sentiment a valuable addition to the landscape of information about the attitudes and behaviours of UK consumers? If so, please let us know!

[1] We do gather data from trans and non-binary people, but the sample size is currently too low to report their scores separately

Stephen Hampshire

Client Manager
TLF Research