New UK government is mired in unreal vibecession
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Francesco Guerrera
LONDON, Oct 2 (Reuters Breakingviews) -Things can only get fiscally worse. That’s been the UK government mantra since the Labour Party took power in July. The gloomy pronouncements have contributed to a slump in consumer confidence, even though the economy is improving. Prime Minister Keir Starmer and Chancellor Rachel Reeves will have to change the narrative in this month’s budget.
Starmer has warned that the decisions to be announced on Oct. 30 will be “painful”, while Reeves has reminded voters that “if we cannot afford it, we cannot do it”. The chancellor already said she would scrap an annual fuel subsidy for around 10 million pensioners. And Reeves has hinted at tax hikes and spending cuts to fill a 22-billion-pound “black hole” blamed on the previous Conservative administration. Voters have got the message. The consumer confidence index compiled by GfK dropped to a six-month low in September, with people feeling worse about both their finances and the economy.
New research shows that Labour’s bleak words are largely to blame. Deutsche Bank analysts have broken down the GfK confidence index into factors including wages, interest rates, unemployment and house prices. They found that the biggest driver of the slump in confidence was the “uncertainty residual” – a psychologically-related element that does not seem to tie directly to any economic data. Past analysis by the Bank of England reveals that this factor moves sharply around key events. For example, it plummeted after the deadly attacks in the United States on Sept. 11, 2001. Gallingly for Starmer, the so-called residual jumped in May 1997 when then-Labour leader Tony Blair became prime minister, after making the upbeat hit “Things Can Only Get Better” his campaign anthem.
The good news for Labour is that the psychological “feelbad” factor in the GfK index doesn’t portend lower consumer spending, according to the BoE study. In fact, retail sales in August rose 1% compared to July, more than double the 0.4% increase predicted by a Reuters poll of analysts. And with UK wages rising by 2.2% above the rate of inflation in the three months to July, Britons have reasons to be chipper.
But Labour still has a problem. Starmer’s approval rating – the difference between the percentage of voters who think he’s doing a good job and those who disagree – is a dismal minus 26%, according to the latest poll by Opinium for the Observer. That’s a 44-percentage-point swing since July. With the next UK election set for 2029, the government is safe for now. But the vibecession dogging Britain means that Starmer and Reeves will have to raise both money and morale on Oct. 30.
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CONTEXT NEWS
The GfK Consumer Confidence Index dropped to a six-month low of minus 20 in September from August’s minus 13, according to a survey published on Sept. 20.
A Reuters poll of economists had pointed to another reading of minus 13. The GfK scores are a weighted net balance of positive responses minus negative responses to five questions on consumers’ personal financial situation and the economy.
Graphic: UK consumer confidence fell sharply in September https://reut.rs/3ZJN6LW
Editing by Liam Proud and Oliver Taslic
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