Political uncertainty, inflation and Brexit dent consumer confidence

By Conor Lambe, Chief Economist at Danske Bank

Consumers in Northern Ireland have experienced a difficult eighteen months due to the squeeze on household spending power. As this squeeze took its toll, confidence levels in households across Northern Ireland fell gradually throughout 2017, reaching a four-year low in the last quarter of the year.

But in the first quarter of 2018, there was some good news as consumer confidence levels bounced back strongly. Unfortunately, the trend did not continue into the next part of the year. The latest Danske Bank Northern Ireland Consumer Confidence Index, published today, reveals that consumer confidence fell sharply in the second quarter of 2018.

In order to better understand what is driving confidence, or the lack of it, among local people we ask those completing our survey which factors had the largest positive and the largest negative impact on their confidence levels.

Given the fall in the second quarter, it seems that the negative factors far outweighed the positive ones. However, there are some insights to be gained by considering both sides.

Once again, political uncertainty and the lack of an Executive is the factor identified by the largest group of people as having a negative influence of confidence. Northern Ireland has now been without a devolved government for more than a year and a half. The consequences of this have been a policymaking vacuum at Stormont and under-representation in the Brexit process. The business community has regularly expressed its frustration at the current political situation, but this data shows that consumers are equally disappointed that the devolved institutions are not up and running at the time when they are most needed, given the UK’s impending exit from the EU. 

People also highlighted the impact of high inflation, which is not surprising given the consumer squeeze experienced last year and continuing into this year. The latest data shows that UK inflation was 2.4 per cent in June, still above the Bank of England’s 2 per cent target. At present, there are two opposing forces influencing the inflation rate. The impact of the post-referendum sterling depreciation is gradually fading, which is exerting downward pressure. But there is upward pressure coming from higher oil prices. That being the case, the numbers could fluctuate a little over the next few months but the annual rate of inflation for 2018 as a whole, and 2019, are both expected to be lower than observed last year.

When asked about the factors positively impacting confidence, a large number of people answered ‘don’t know’, which can be explained by the overall fall in confidence levels and the fact that people, broadly speaking, are not feeling particularly optimistic.

Almost a fifth of people identified rising wages as boosting their confidence and this suggests that the relative strength of the local labour market is contributing to higher wage growth. This is what economic theory predicts should happen as a smaller pool of unemployed workers means that employers have to pay more to attract workers from other companies or to tempt inactive people back into the labour force. Employees also tend to have more negotiating power in wage discussions when the labour market is in good health.

Another factor identified by people as positively impacting confidence was low interest rates. Despite rising last November, interest rates in the UK remain at a historically low level, which is helping to keep loan repayments down for borrowers. This Thursday, the Bank of England’s Monetary Policy Committee (MPC) will decide on whether to raise interest rates or hold them at 0.5 per cent. My personal opinion is that interest rates will rise to 0.75 per cent this week as the MPC has signalled an intention to gradually raise interest rates, and given the potential for a political frenzy around Brexit later in the year, now seems like the most sensible time to act. But bearing in mind that rates did not rise in May when financial markets were convinced they were going to, I make this prediction somewhat cautiously. 

Regarding Brexit, as might be expected, some people view it positively and some people view it negatively.  However, when looking at opinions on both the Government’s long-term Brexit objectives and the progress in the negotiations, the proportion of people highlighting these factors as having the biggest negative impact on them is higher than those who identified them as having the biggest positive impact. And as our survey was carried out in June, the views don’t reflect the subsequent roller coaster ride of the Chequers proposal, ministerial resignations and knife-edge votes in the House of Commons.

It is encouraging that people are able to identify some factors that are making them feel optimistic. But it’s clear that the negative factors are weighing more heavily on consumers in Northern Ireland. That bounce back in confidence in the first quarter of the year feels a long way away now.

This article was published in The Belfast Telegraph on 31st July 2018

Want to get in touch?