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A new year marks a fresh start.
Recent economic data offers little conclusive evidence of a significant shift, neither confirming a strong recovery nor supporting the most pessimistic forecasts of decline and recession. While the economic outlook remains uncertain, the new year presents an opportunity to reset policy, instill a sense of stability, and, perhaps most importantly, improve overall economic sentiment.
One particular indicator may shed light on both the current state and the future prospects of the UK economy, and potentially reveal insights into the nation’s political trajectory.
That indicator is consumer confidence. These long-standing surveys essentially serve as an economic “psychiatric evaluation” of the nation, gauging perceptions of economic prospects, willingness to make major purchases, and overall financial well-being.
The GfK Consumer Confidence Barometer provides a robust data source, utilizing consistently asked questions spanning five decades.
Having tracked this metric for half its existence, it’s clear that while imperfect, the fundamental principle of calculating net confidence by subtracting the pessimism score from the optimism score offers valuable insights.
Historically, these patterns have been interesting and consistent, serving as a crucial predictor for those in power. As the saying goes, “It’s the Economy, Stupid.”
However, has a fundamental change occurred? The following chart is remarkable and has been circulated among top government officials.
A brief explanation is warranted.
This chart disaggregates the headline net confidence number by age cohort.
In the past, these cohorts generally moved in tandem, exhibiting correlation.
Younger individuals typically demonstrate a more optimistic baseline, which tends to diminish with age – an unsurprising trend – and all age groups generally react to events in a similar fashion.
Over the past decade, correlated declines in consumer confidence across all age groups are evident in response to the post-Brexit era and the impact of the pandemic.
The significant impact of the Russia-Ukraine war and the subsequent surge in energy prices is also clearly visible.
Notably, the Liz Truss mini-budget in 2022 had a devastating effect on all age groups, leading to a loss of confidence in the short-lived government and the overall economic outlook.
Until late 2024, these lines largely moved in unison.
However, a significant divergence occurs in late 2024.
Consumer confidence among those under 50 increases, with the under-30s experiencing a surge to levels not seen since Brexit.
Conversely, the over-50s and over-60s experience a collapse in consumer confidence, plummeting toward levels last observed during the Truss era.
Why is it that older demographics, particularly pensioners, are experiencing another downturn in economic confidence, while younger adults are considerably more optimistic?
The dotted line represents the 2024 General Election. While correlation does not imply causation, this is the point at which the age-related divergence emerges.
One possible explanation from a political economy perspective is a reversal in the flow of causality between economic and political sentiment.
Previously, financial perceptions influenced voting behavior; now, voting patterns appear to influence perceptions of personal finances and the country’s economic outlook.
Younger, predominantly liberal-left individuals are now more optimistic after enduring a series of crises this decade, and with a government they largely supported in 2024.
Older voters, who predominantly supported Conservative and Reform parties, are dissatisfied and unconvinced, believing the country has deteriorated further.
One potential factor is the pervasive tone of social media, with its algorithms that often amplify emotive doom-scrolling and outrage. Is this demographic reacting to a perceived Mad Max-style dystopia presented on their social media feeds, resulting in a negative outlook?
Evidence from US consumer sentiment surveys also suggests a political bias in economic confidence. Following the transition from the Donald Trump to the Joe Biden administrations at the end of 2020, economic confidence among Democrats surged, while Republicans’ confidence plummeted.
The Biden administration subsequently lamented what staffers termed the “Vibecession” – a prevailing sense of economic unease that did not align with positive economic indicators.
Other economic factors are also at play.
The rebound in confidence among younger individuals coincides with the Bank of England’s initial interest rate cuts, which are generally beneficial for young homebuyers and job seekers but potentially detrimental to older savers.
Significant economic consequences could arise if this analysis holds true.
This might explain the unusually high, near double-digit UK savings rate, resembling a pandemic-era anomaly. Older Britons may be holding onto their savings, feeling pessimistic about the country and the economy, and consequently restricting spending, thus weighing down GDP even as wage growth remains higher than inflation on average.
The trends observed in this chart are also reflected in recent financial results from businesses.
Many retail results have defied expectations. Some business leaders who frequently complain about National Insurance increases appear to be reporting healthy sales and profits, effectively absorbing the tax burden.
Pub chain Mitchells & Butlers “traded very strongly across the festive season with like-for-like growth of 7.7%”. Fullers reported an “outstanding five-week Christmas and New Year season across all parts of the estate”, with an 8% increase compared to an already strong festive period last year.
While challenges related to price increases persist, inflation is trending downward toward the 2% target, with government efforts to limit regulated price increases for rail and water.
Further interest rate cuts are expected to be implemented gradually, and the impact of previous cuts will continue to filter through to households.
A mortgage price war may be on the horizon, potentially stimulating a housing market rebound after months of budget-related uncertainty.
The government hopes to put a challenging 2025 behind it, anticipating an investment boom exemplified by recent announcements concerning Heathrow and a new northern train line.
Therefore, a foundation exists to challenge the prevailing pessimism. However, could politically charged perceptions of economic confidence hinder this progress?
The Treasury has agreed to reimburse the VAT on some fees charged by the Royal School Dungannon and the Royal School Armagh.
The States of Guernsey is due to vote on the future tax policies for the island later this year.
Coventry City Council will explore the possibility of introducing a fee paid by overnight visitors.
The economy was boosted by a rebound in car production and from the services sector.
The rate of economic growth affects things like pay increases and the amount of tax raised.
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