Consumer confidence sees its largest increase in 18 months

The latest Deloitte Consumer Tracker shows that UK consumers have shrugged off post- referendum pessimism, with consumer confidence returning to a five-year high in Q3 2016. In a sign that Brexit fears have been put to one side Deloitte's consumer confidence index rose by three percentage points quarter-on-quarter, its largest increase in 18 months.

Five out of the six measures which make up the confidence index rose between the second and third quarters. There were strong gains in consumer confidence regarding job security, job opportunities and career progression. The job security index rose by six percentage points compared to the last quarter after having fallen for three consecutive quarters.

In an inversion of the usual relationship, sentiment among Londoners is running lower than for the rest of the UK. Confidence in London has dropped by three percentage points in Q3 2016 and is now nine percentage points lower than it was the same period a year ago. Voting patterns in the referendum showed a majority of Londoners were firmly in the Remain camp. Given the capital's dependence on financial services, a Brexit-led downturn could weaken its economy leading to job cuts, falling house prices and a decline in business activity.

Consumer spending overall remains largely stable supported by low inflation. However, expenditure continues to shift from essentials to discretionary categories. Net spending on essentials was flat for the second consecutive quarter, while net spending on discretionary categories rose by one percentage point. Moreover, the gap between leisure and retail spending is narrowing as consumers continue to favour spending on experiences such as holidays rather than on goods.

The strength of consumer spending is reflected in the growth of retail sales since the beginning of 2016, with a 5.5 per cent rise in the three months to August 2016 compared to a year earlier. With the consumer-focused economic fundamentals still showing few signs, if any, of a slowdown since the end of June, we expect retail sales growth to continue into the fourth quarter.

Looking further ahead, the UK consumer faces the prospect of higher inflation and the start of the formal Brexit process in 2017 – two events that pose challenges to consumer spending power and sentiment.

CONSUMER CONFIDENCE

Consumer confidence returns to a five-year high in Q3 2016

In a sign that Brexit fears have been put to one side Deloitte's consumer confidence index rose by three percentage points quarter-on- quarter, its largest increase in 18 months.

Five out of the six measures which make up the confidence index rose between the second and third quarters.

There were strong gains in consumer confidence regarding job security, job opportunities and career progression.

The job security index rose by six percentage points compared to the last quarter after having fallen for three consecutive quarters.

An inversion of the usual North vs London relationship

Confidence among Londoners fell by three percentage points this quarter and is now nine percentage points lower than it was a year ago.

In the meantime, confidence in the North is at its highest since the series began.

Londoners were also less confident about the security of their jobs.

Given the capital's dependence on financial services, a Brexit- led downturn could weaken its economy leading to job cuts, falling house prices and a decline in business activity.

Uncertainty among the Chief Financial Officers of the UK's largest corporates remains high post-Brexit.

CONSUMER SPENDING

Consumer spending remains stable

British shoppers have kept on spending in the aftermath of the vote to leave the EU.

Consumer spending overall remains largely stable supported by low inflation.

However, expenditure continues to shift from essentials to discretionary categories. Net spending on essentials was flat for the second consecutive quarter, while net spending on discretionary categories rose by one percentage point.

Moreover, the gap between leisure and retail spending is narrowing as consumers continue to favour spending on experiences such as holidays rather than on goods.

The strength of consumer spending is reflected in the growth of retail sales since the beginning of 2016, with a 5.5 per cent rise in the three months to August 2016 compared to a year earlier.

Inflation remains low across most categories, with competition continuing to keep prices down in the grocery sector.

However, while overall inflation in August remained flat at 0.6 per cent, it has been rising since the start of 2016.

UK retailers have seen their costs rise as a result of the introduction of the new higher minimum wage and the fall in the value of sterling.

The key question for retailers is how much of these increased costs they will be able to pass on to consumers while still protecting their margins.

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