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Consumer confidence in the UK has fallen to its lowest level on record almost 50 years ago as rising inflation hits household finances and the broader economy.
The data released by research firm GfK came a day after official figures revealed that interest payments on the UK government debt last month hit one of their highest levels on record as rising inflation capped an expected contraction in public sector borrowing.
The sharp rise in the consumer price index, which hit a 30-year high of 9.1 percent in May, also caused business sentiment to fall to its lowest level in two years, according to separate figures from S&P Global/CIPS UK Purchase, the Manager Survey, which also released on Thursday.
The UK Consumer Confidence Index, an indicator of how people perceive their personal financial situation and the general economic situation, fell one notch to -41 in June, the lowest since records began in 1974.
Joe Staton, client strategy director at GfK, said the drop reflected prices rising faster than wages and the prospect of strikes and rising inflation causing a summer of discontent.
“Consumer sentiment is now bleaker than it was at the start of the Covid pandemic, the outcome of the 2016 Brexit referendum and even the shock of the 2008 global financial crisis, and now there is talk of a looming recession,” he added.
The index, based on interviews conducted in the first half of June, showed a particularly large drop in expectations regarding personal finances as rapidly rising prices limit consumer purchasing options. A reading below 30 has historically been associated with the economy entering a recession.
Rising inflation also cast a shadow over public finances and business sentiment.
Interest costs on government bonds rose to £7.6 billion in May, up 70 per cent year on year and higher than the £5.1 billion forecast by the independent financial regulator, after a 40-year high pace Retail price inflation that led to many debt payments are related.
The Office for National Statistics said the debt interest payments were the third highest made by the government in a single month and the highest made in any May since records began.
Inflation is increasing the government’s borrowing costs, as retail price index-linked government bonds account for 25 per cent of UK government debt.
Public sector net debt nevertheless fell in May, albeit less than expected, as inflation also supported government finances by generating higher tax revenues.
Borrowing was £14 billion in May, down £4 billion from the same month last year, ONS data shows. But May’s borrowing was higher than the £12 billion forecast by economists polled by Reuters and well above the £10.3 billion expected by the Office for Budget Responsibility watchdog.
The strong job market and the reopening of the economy also boosted government revenues. In May, government revenue rose by £5.7bn, including an annual increase in tax revenue of £3.4bn.
Samuel Tombs, an economist at Pantheon Macroeconomics, noted that government revenue fell short of OBR forecasts, particularly for consumption tax revenue. This could indicate “that the economy is falling short of the OBR’s expectations,” he said.
Borrowings for April were also revised upwards. This means that state finances for the current financial year “started disappointingly,” said Martin Beck, chief economic advisor of the EY Item Club.
Chancellor Rishi Sunak said: “Rising inflation and rising debt interest costs pose a challenge to public finances, as well as family budgets.”
The higher interest payments were also partially offset by the end of most government Covid-19 support programs.
Michal Stelmach, senior economist at KPMG UK, said “the pace of deficit reduction will slow down in the coming months” as a result of the government’s €15bn growth support package announced last month.
The June PMIs added that the UK economy is heading for a fresh downturn as inflation weighed on consumer spending intentions and business expectations.
The preliminary composite PMI index, a barometer of month-on-month change in private sector activity, was unchanged from last month’s 15-month low at 53.1.
However, the forward-looking index of business expectations recorded the largest monthly decline since the pandemic began. The new orders index fell to 50.8 in June from 53.8 in May, signaling the weakest growth rate in more than a year
Chris Williamson, chief economist at S&P Global Market Intelligence, said: “Business confidence is now down to levels that have historically typically signaled an impending recession.”
