A leading consumer confidence index rose by nine points to forty-seven in January, the highest it has been since August 2011 – although this figure is still nearly thirty points below the average.
The improvement in consumer morale supports the Bank of England’s view that consumption will help stabilise the economy later this year, as a fall in inflation eases the squeeze on household budgets.
One chief economist said: “Looking forward, renewed hope that the UK will avoid a double-dip recession may support sentiment, especially since the downward trend in inflation is set to continue through 2012.
“With the UK recovery likely to remain weak in the first half of the year, a significant and sustained rise in consumer confidence remains unlikely in the near term."
The increase in consumer confidence is being attributed to improved industry surveys for the manufacturing and service sectors, as well as the recent sharp fall in inflation.
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It is expected that households will receive a welcome boost later today when the Bank of England signals that inflation will fall below 2percent in the coming months.
Following two years of shrinking incomes, the Bank of England’s latest quarterly Inflation Report is expected to show a sharp drop in the forecast for the benchmark consumer prices index (CPI); providing further cause for hope.
The downward trend has already started, after the Office for National Statistics reported yesterday that inflation fell to a 14 month low in January; with the pace of the decline expected to accelerate.
A sharp fall would help to ease the squeeze on households, which have been hit by a combination of high inflation, rising unemployment, and low wage rises; and economists are expecting such a fall to prevent the UK facing a double-dip recession and hold on to its AAA credit rating.
The resurgence in optimism has been driven by better-than-expected recent surveys and also the markets shrugging off Moody’s rating warning yesterday, to reinforce Britain's "safe haven" status.
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The ratings agency, Moody’s, has warned the UK its credit rating may be cut in future, potentially increasing borrowing cuts.
Following concerns about the possible impact of the Eurozone crisis on the UK’s growth prospect, the US agency have put the UK on “negative outlook”, implying there is a thirty percent change the UK could lose its AAA credit rating within the next eighteen months.
Moody’s said in a statement: “The increased uncertainty regarding the pace of fiscal consolidation in the UK due to materially weaker growth prospects over the next few years, with risks skewed to the downside.
“Any further abrupt economic or fiscal deterioration would put into question the government's ability to place the debt burden on a downward trajectory by fiscal year 2015-16.
“Although the UK is outside the Euro area, the high risk of further shocks within the currency union are exerting negative pressure on the UK's AAA rating given the country's trade and financial links with the Euro area.
“Overall, Moody's believes that the considerable uncertainty over the prospects for institutional reform in the Euro area and the region's weak macroeconomic outlook will continue to weigh on already fragile market confidence across Europe.”
Other European countries including Austria and France have also been warned about the future of their credit rating; whilst Italy, Portugal and Spain have had their ratings lowered.
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The Confederation of British Industry (CBI) has forecast that the UK will narrowly avoid a double dip recession during 2012; although they have announced that the fate of the country’s economic future is closely tied to the Eurozone.
In their latest economic forecast, the CBI have lowered their estimates of British growth from 1.2 percent predicted in November 2011 to 0.9 percent, forecasting a fragile 0.2 percent growth during the first quarter of 2012.
The CBI say the latest figures are in response to the economic contraction recorded during the last three months of 2011; with CBI’s general director, John Cridland, saying: “Economic conditions will continue to be tough, especially in the first half of the year, and the UK recovery will depend on the successful resolution of the Eurozone crisis.
“Although risks remain we expect growth this year, improving modestly in 2013, primarily driven by positive net trade and business investment.
“The pressure on household incomes will also ease slightly in the second half of this year as inflation falls, resulting in a slight increase in consumer spending. But weak wage growth and high levels of unemployment will continue to be a brake on household spending.”
The CBI have predicted that during the next twelve months growth will pick up, forecasting a 0.6 percent increase in the third quarter and a 0.5 percent growth in the final quarter; whilst also predicted a two percent growth during 2013.
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The Prime Minister, David Cameron, is considering introducing tax break to people who hire cleaning or other household services, in a bid to help working families who are financially struggling.
A similar scheme is currently in place for working families who employ a nanny through Ofsted. Under the current scheme, families with an Ofsted registered family are able to receive a childcare voucher from their employer and reduce their tax.
With Mr. Cameron under growing pressure to draw up plans to help families, who are struggling with the most severe squeeze on their disposable income for a generation, it is thought that Cameron will consider extending the scheme to include home help, in a similar scheme currently used in Sweden.
Speaking at the Nordic-Baltic summit in Stockholm, Cameron said: “What you do in Sweden in terms of tax help and tax relief, not so much on child care but on other things that help women go out to work, I thought that was a very interesting idea that I want to look at further.
“We’ve made some big steps forward on the child care agenda, helping parents of two, three and four year-olds with nursery care.
“We’ve also made some big steps forward in terms of parental leave, but this is another agenda that’s worth looking at. Clearly Sweden has some interesting ideas in this area.”
It is hoped that the introduction of the scheme in the UK would reduce black market and cash-in-hand domestic work, by making it cheaper to employ home help officially.
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