Starmer's Gloom Showers Down on Consumer Confidence

Above: London, United Kingdom. Prime Minister Keir Starmer gives his Inheritance speech in the garden of 10 Downing Street. Picture by Simon Dawson / No 10 Downing Street.

The government's downbeat tone on the economy and the nation's finances is having a chilling effect on UK consumers.

The country's longest-running and most important survey of consumer confidence shows a sharp fall in confidence, with the new government's downbeat messaging blamed for the deterioration.

GfK says its Consumer Confidence Index fell sharply to -20 in September, taking it to levels last seen at the beginning of the year. All measures were down in comparison to last month’s announcement.

There were major corrections in the outlook for our personal financial situation for the next 12 months (down nine points), our views on the general economy for the coming year (down 12 points), and the major purchase index (down ten points).

Economists say the slump in confidence is most likely due to the new government's attempt to prepare the nation for fresh tax hikes and spending cuts in October.

"This is not encouraging news for the UK’s new government. Strong consumer confidence matters because it underpins economic growth and is a significant driver of shoppers’ willingness to spend. Following the withdrawal of the winter fuel payments, and clear warnings of further difficult decisions to come on tax, spending and welfare, consumers are nervously awaiting the Budget decisions on 30th October," says Neil Bellamy, Consumer Insights Director at GfK.

Prime Minister Keir Starmer gave a particularly dour speech in Downing Street at the end of the summer recess, and economists said at the time that the tone risks hitting UK economic growth.

"Words matter, and the new government’s persistent downbeat tone around the economy and the upcoming budget could become a self-fulfilling prophecy," says Matt Britzman, senior equity analyst, Hargreaves Lansdown.

The government will announce its first budget in October and a number of tax rises and spending cuts are expected to be announced.

Jane Foley, Senior FX Strategist at Rabobank, says the budget may complicate the positive outlook for the Pound. "Not only may it sour investor sentiment, but a hefty round of tax hikes could impact market expectations regarding the pace of BoE easing."

Starmer said on August 29 that the government's first budget, "is going to be painful" and "those with the broadest shoulders should bear the heavier burden."

He talked of a £20BN budget "black hole" and he had no choice but to make "big asks" of ordinary people who would need to "accept short-term pain for long-term good."

Press reports suggest fuel duty rises and wealth taxes are being sounded out by the government, while a Capital Gains Tax (CGT) increase is almost certain.

"The economic outlook depends upon the fundamentals, policy choices & confidence. Lose confidence and it deters people from spending or firms from investing. Realism is needed but get the balance right. Don't talk yourself into a downturn," says Gerard Lyons, Chief Economic Strategist at Netwealth.

With the consumer now in retreat, it appears the warnings were correct.