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The credit crunch has clearly affected consumers’ confidence as the Nationwide Consumer Confidence Index fell to the lowest level since the survey began in May 2004.

Dwindling consumer sentiment 

The Index fell by seven points in the month, bringing the level to 70 - 22 per cent lower than April last year. The biggest factor behind the drop in confidence is dwindling consumer sentiment about the economic situation since last autumn.

All four measures of confidence dropped in April. The biggest shift was in consumer sentiment about the current economic situation, which fell nine points to 65.

This was largely driven by a downward shift in confidence around the current economic situation.

Consumer sentiment about the economic and employment situation and their income in six months’ time (the Expectations Index) fell for the first time this year from 79 to 74 and consumer intention to spend on household goods and major purchases (Spending Index) fell two points to 65.

Gradual interest rate cuts 

Fionnuala Earley, Nationwide’s chief economist, said that the cut in interest rates in April did little to lift consumer spirits.

Food and fuel prices remain high and, with house prices no longer rising, Earley thinks it is unlikely that consumer confidence will pick up very quickly.

“We may have to accept that confidence levels could well worsen before they get better. This is especially true as inflationary pressures mean the MPC will probably prefer to cut rates at a more gradual pace than many would prefer,” Earley added.

Consumers’ feelings about the current economy took a turn for the worse in April – only 17 per cent of people think the current economic situation is good.

This is less than half of the level that thought the economy was in good shape before the credit crunch and Northern Rock issues arose (36 per cent). In fact, there has been a near complete reversal in economic sentiment since the autumn.

Lasting economic impact 

Today, over one third (39 per cent) of consumers think the economy is in bad shape – a very similar proportion to those who thought it was in good shape before the credit crunch hit.

Looking ahead, almost half (45 per cent) of consumers believe that the economy will be worse in six months’ time, compared to 26 per cent who thought this at the same time last year.

Weaker confidence in the economic future also seems to coincide with developments in the financial markets and suggests that consumers think that the credit crunch will have some lasting economic impact.

While there is still a reluctance to believe that a weaker economy will affect household incomes, consumers are less upbeat about the labour market.

Reluctant to purchase household goods 

With weaker economic sentiment, falling house prices and ongoing rises in fuel and food prices, it is not surprising that consumers are less confident about spending, particularly on major purchases.

Sixty per cent of consumers believe now is a bad time to make a major purchase such as a house or car compared with around half (51 per cent) six months ago.

Consumers are also more reluctant to purchase household goods – 12 per cent believe now is a bad time to buy – twice as many as six months ago.

Despite a slight improvement in March, expectations around house prices fell once again in April. Consumers anticipate that house prices will fall by -1.7 per cent over the next six months.

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Related links

• Nationwide
• Nationwide Consumer Confidence Index