Consumer 2017: How will confidence fare this year?

As shoppers reacted to the dramatic events and then recovered, measures of confidence yo-yoed.

But what can we learn from last year and how might consumer confidence play out over 2017? And how will this affect shoppers’ spending decisions?

Last year was one of political earthquakes. But consumer confidence in 2016 started relatively brightly, with GfK’s January barometer at +4 as shoppers showed more optimism around their personal finances.

However, by July this confidence had evaporated as consumers reacted to the uncertainty sparked by the UK’s shock vote to leave the EU.

Brexit effects

Consumer confidence suffered its biggest drop in 26 years in the wake of the referendum – as all five measures of GfK’s survey fell sharply.

GfK’s head of market dynamics Joe Staton says people felt a “strong sense of a loss of control post-Brexit”.

Under GfK’s measures confidence recovered up until September, but then slid down again in December to -7.

“Average house prices have held up so that contributes to people feeling good.”

Joe Staton, GfK

Staton says confidence has held up as wages have gone up and prices have been flat, so consumers’ money has “gone further”.

He adds: “Average house prices have held up so that contributes to people feeling good.”

Despite the bumps in consumer confidence, shopper spending held up relatively well last year.

Paul Martin, KPMG’s UK head of retail and co-chairman of the Retail Think Tank, says: “You could argue that the ‘Great British’ consumer broadly ignored the results of the Brexit referendum, with consumer spending continuing to grow over the final months of the year.”

And GfK’s latest survey last month showed that consumers were still relatively confident about their personal financial situation.

However Staton noted that “confidence in the general economic situation for the UK has collapsed in the face of uncertainty about the future both at home and abroad”.

Repercussions

This year is expected to bring more repercussions of the monumental political decisions made in 2016.

The government is promising to trigger Article 50 – which will officially start the negotiations for leaving the EU – in March.

However it will coincide with Dutch elections, possible Italian elections and French Presidential election campaigning.

All this could have a knock-on effect on the UK.

“An intensification of UK-EU hostilities could result in more businesses sitting on their hands… and this may feed through into weaker consumer confidence”

James Knightley, ING

“Incumbent governments trying to make ‘change’ look as unpalatable as possible could, for example, offer dire warnings over what Brexit will mean for Britain,” says James Knightley, senior UK economist at ING, in a report by the Retail Think Tank.

“This could prompt an intensification in the war of words between the UK and EU officials.

“At the very least it means the UK makes next to no headway in Brexit negotiations until after German federal elections in September.”

Brexit could also affect hiring and investment decisions by firms.

Knightley says this is “largely due to the perceptions that uncertainty will increase once the Brexit countdown clock begins”.

He adds: “An intensification of UK-EU hostilities could result in more businesses sitting on their hands… and this may feed through into weaker consumer confidence.”

“It will be interesting to see how bonkers Trump is”

Joe Staton, GfK

Staton also believes we should not underestimate the impact of Donald Trump’s entry into the White House.

“It will be interesting to see how bonkers Trump is,” he says.

“I think it will have a bigger impact overall (than Brexit). It’s so extreme.

“It could be where the world swings towards protectionism. The US situation will impact domestically on how secure we feel.”

All this signals bad news for many retailers.

Inflationary pressures

But shoppers will not desert the high street completely, so how will individual sectors fare?

2017 is expected to see a return to some food price inflation, which means shoppers will be spending more on groceries.

Verdict predicts that food inflation will average around 2.4% – the highest since 2013.

However as Verdict’s Maureen Hinton warns, inflation will mean “consumers will become ever more careful with their spending”.

As grocery accounts for 45% of all retail spend, this could mean a drag on discretionary purchases, particularly big-ticket electricals and homewares.

“Spending will have been bought forward into 2016’s fourth quarter and the New Year Sales as consumers anticipated big prices rises,” says Hinton.

“This factor and a sluggish housing market will slow down growth.”

As discretionary spend, fashion is also expected to be affected, which is the last thing the sector needs after a challenging year for many established players in 2016.

Static wages

Knightley warns that wages are unlikely to rise which could see more lurid headlines about a “cost of living crisis”, running the risk of “further eroding confidence and leading to weaker retail sales”.

Kay Neufeld, an economist at Cebr, has said the downward trend in spending power is no longer a “blip”.

Commenting on Asda’s last Income Tracker released last month, she said: “Rising prices for petrol and several services are eating into families’ budgets – prices for communication, health care, but also for staying in hotels or eating in restaurants, have all increased year-on-year.

An economic slowdown in 2017 could put additional pressure on the labour market”

Kay Neufeld, Cebr

“Households’ weekly spending power is still increasing, but this might not be the case in 2017.

“The greatest danger stems from rising inflation paired with a flailing labour market.

“While wage growth has accelerated in the latest readings, employment growth has slowed and the claimant count is rising – an economic slowdown in 2017 could put additional pressure on the labour market”.

Meanwhile, the drop in spending in non-food sectors could mean more retail businesses collapse, according to Jonathan De Mello, head of retail consultancy at Harper Dennis Hobbs.

“Because retailers will be facing increased costs and lower demand, we are going to see quite a few fail,” he tells Retail Week.

And this in itself could affect the mindset of shoppers. “If they do (fail), clearly that will be headline news – and that will further affect consumer confidence,” adds De Mello.

Feel good purchases

Retailers will also have to grapple with the trend for consumers spending their money on ‘feel-good’ experiences.

As Staton says: “If you look at the high street – there’s a growing number of beauticians, nail bars and fast food outlets.

“People want to spend more on feel-good experiences, which gives you more than going out and buying a new jumper.”

“People want to spend more on feel-good experiences”

Joe Staton, GfK

However, Staton flags that the state of interest rates is likely to impact how shoppers feel about spending.

“The Bank of England will look at rates,” he says. “I don’t think we’ll see massive hikes, but a quarter of a percent could have a psychological impact (on shoppers).”

While 2017 is unlikely to bring quite as many shockwaves as last year, there are still plenty of factors at play that could rock consumer confidence – and retailers must prepare for a tightening of belts.

As DeMello says: “People will be battening down the hatches to see how Brexit turns out.”