UK consumer confidence hits new low as recession looms

John Dixon

Whittle Industry Data

The announcement by the Bank of England in early August of a 0.5% increase in interest rates was widely anticipated, but the gloomy narrative that accompanied it was significantly worse than expected. Added to this, GDP growth has now been slowing sharply since the pandemic bounceback increases ended, with growth in the 3 months to the end of June now down 0.1% according to figures issued in mid-August by the Office for National Statistics and with the month of June alone down 0.6%. The UK was already forecast in July to enter a recession by the end of the year with falling output expected to continue right up until the end of 2023 before any improvement is seen.

This is a major reversal of recent forecasts and in particular, the increase predicted for 2023 by the OBR as recently as March this year. It is also in stark contrast to H M Treasury’s forecast summary report from a further 28 banks and forecasting bodies compiled just a month ago with no organisation at that time predicting a decrease in output for 2023 - a salutary warning of the perils of economic forecasting if ever there was one! If this current forecast of a recession does come to pass which now seems highly likely, then it would make it easily the longest, but almost certainly not necessarily the deepest, downturn since the recession of 2008/2009 following the financial crisis.

The main culprit in all this is inflation, caused overwhelmingly by soaring energy bills resulting from Russia's invasion of Ukraine and the failure of politicians to reach a political settlement that would solve the problem. As a result, the Bank of England now expects typical household energy bills to hit £3,500 a year by October (and possibly more) meaning bills of almost £300 per month.

The impact of all this is obvious with consumers reining back expenditure and consumer confidence plunging. The GfK consumer confidence barometer (amongst other similar surveys from YouGov, PwC and KPMG, etc) is now at a 40-year low while the measure of confidence amongst households on their personal financial situation is also at a record low.

Higher mortgage rates will further curtail consumer spending and this will impact discretionary expenditure on holidays and travel, entertainment, household goods, home improvements and particularly larger DIY projects. In terms of the wider construction economy, also directly affecting BCF member firms in the decorative paint sector, figures published by the Construction Products Association in mid-August show total housing output across this sector is now forecast to fall 0.1% in 2022 and by 1.0% in 2023 before returning to growth in 2024. Elsewhere, the forecast for the key private sector new housing and repair, maintenance, and improvement sector (RM&I), accounting for nearly a third of all construction, is expected to be even harder hit falling by 3% this year and a further 4% in 2023, although with growth returning in 2024 and by then with inflation expected to be much lower.

For housing transactions, which are normally 5 times the number of new constructions, the news is also not so good in Q2 with June's figure down 55% on the buoyant levels of June 2021 making it the ninth consecutive monthly fall and with worries about interest rates and the affordability of properties likely to come into clearer focus in the latter part of the year.

Other factors, not currently of immediate concern may also start to weigh on consumers’ minds as the cost-of-living forces consumption down and worries start to emerge about employment levels (despite current shortages) if the expected downturn at the end of 2022 and into 2023 continues longer than expected. So, what does this mean for decorative paint sales? Already this year total decorative sales litreage is down 16% in the first half of 2022 on top of a 9% fall in calendar 2021 following the end of the DIY boom earlier last year.

The short-term signs are not good for 2022 as a whole particularly for retail where the market in the first half of this year is down 27% and with the forecast from Palmer Market Research suggesting a 20% fall for the year. However, with new monthly sales figures from now onwards being compared with very weak sales at this time last year there may be scope for more optimism than at first appears to be the case. There has been some evidence of this in June and July when retail paint volumes fell 18% and 8% compared with a 30% decrease on average for the last 12 months as a whole. Beyond the current year, Palmer expects to see a 4% improvement in retail paint for 2023 and a 2% fall in 2024.

On the trade side, sales so far in 2022 are down just 4% and again with some fairly hefty decreases seen in the final half of 2021 there may be more room for some modest increases in the coming months. Palmer is forecasting only a 0.4% fall for 2022 as a whole so a lot better than retail. However, an alternative more upbeat picture contained in the CPA’s so called “upper scenario” which assumes somewhat stronger economic growth (despite the accepted high inflation) and with housing transactions being similar to pre-pandemic levels would point towards growth of about 2% in 2022 and 2023 rising to 3.6% in 2024. The long-term fundamentals, such as household formation, population growth, and interest in home improvements generally remain positive and these influences should support the market going forward in the longer term.

Aside from the traditional housing sector (both new work and RM&I) there is also the commercial and industrial sector of construction including public non-housing buildings, infrastructure (less important for paint), offices and hospitality, factories and warehouses, etc, where new work is expected to hold up somewhat better than housing over the next few years and where there may be good opportunities for member companies.

For woodcare, sales have continued to endure a rough ride this year being down 39% so far in 2022 but with retail expected to improve 8% next year and with trade woodcare forecast to be broadly flat according to Palmer.