New Labour government takes Reverend I M Jolly schtick to new heights

Our Scottish personalities trend firmly towards the dour and presbyterian and that’s how we like it. It takes a lot for us to accuse someone of being a bit too hairshirt-y. But having come to power in July, the new Labour government have taken the whole Reverend I M Jolly schtick to new heights (lows?). Is there a danger that this downbeat messaging could end up damaging the economy?

Inflation falls but nerves on edge as Budget approaches

Some recent data would suggest that the pessimism is taking its toll. In September, the Gfk consumer confidence index had its largest monthly fall of the year declining by seven points to -20. Persistent headlines about the dire economy inherited by the new government and a £22 billion “black hole” (which really should be viewed in the context of a c.£2.3 trillion economy) have done little to buoy sentiment.

This is further reflected in an elevated UK household savings ratio, which at c.10% has reached levels that suggest consumers still feel the need to protect their own balance sheet.

Despite all this, though, the actual economy seems to be ticking along reasonably well. The BRC retail monitor showed sales increased by close to 2% year on year in September, outstripping analyst expectations. What could explain the divergence between this and the weaker confidence measures?

Firstly, it is important to distinguish between how people feel about their own personal financial situation and the broader general economy. Diving into the details of the Gfk study, consumers remain considerably more positive for their own outlook than they do about the UK. Secondly, and perhaps more importantly, there are valid questions about how reliable confidence surveys are as a leading economic indicator.

Inflation fall provides boost for Chancellor ahead of Budget

In the US, for example, the correlation between sentiment readings relative and actual economic activity appear to have broken down since the pandemic. Clearly, though, elevated savings rates indicate that the UK consumer is still operating with one foot on the brake. This seems unnecessary. Personal balance sheets are in rude health, with net household deposits currently at a higher level than net household lending. Prior to the Covid-related savings boom, lending had outstripped deposits since before the turn of the century. 

The Asda income tracker for August showed that disposable income increased by 12% over the prior year, reaching £247 per week for the average UK household. This is the highest level reached since early 2021, prior to the cost of living crisis. While borrowing costs remain higher than the ultra-low levels that we became accustomed to in the post-GFC era, they are markedly below the peaks of the last two years.

All the ingredients are there for consumer spending to accelerate over the next few years. For investors, any uptick should benefit a whole swathe of domestically-exposed UK stocks. Retailers, leisure companies, building materials manufacturers and many more would all love to see the UK consumer put their foot on the accelerator. But will this happen?

Colin McLean: Have no fear in the hunt for quality and value

There are some encouraging signs of late that the government recognises they might have gone a bit OTT with the jeremiads. Like everyone else, we’re awaiting Rachel Reeves’s first Budget on October 30 and while recognising that some tough decisions will have to be made on spending and taxation, we hope that these are accompanied by a more hopeful message about the outlook for the country.

If any advice is needed, we know some PR agencies that can offer great tips on how to reinvent a message.

Craig Jeruzal and Neil Veitch are managers from River Global Investors