U.K. Consumer Confidence Drops the Most in a Year (Update2)

By Svenja O’Donnell
Jan. 6 (Bloomberg) -- U.K. consumer confidence fell in December by the most in more than a year as expectations for the economy deteriorated, Nationwide Building Society said.
The index of consumer sentiment declined five points from the previous month to 69, the biggest drop since November 2008, the customer-owned lender said in an e-mailed statement today. A measure of consumers’ economic expectations in the next six months fell eight points to 101.
With December marking the annual Christmas season peak for shopping, the report may signal a setback for retail spending as consumers brace for higher taxes to curb Britain’s record budget deficit. Prime Minister Gordon Brown is trying to revive the economy and restore support among voters in time for an election due by June.
"An element of caution may have begun to creep back into the minds of consumers," Nationwide Chief Economist Martin Gahbauer said in the statement. "Lower expectations may foreshadow a more sluggish consumer outlook in 2010 as stimulus measures are withdrawn."
The pound was little changed against the dollar today, trading at $1.6018 as of 10:03 a.m. in London. The yield on the two-year U.K. government bond rose 1 basis point to 1.316 percent.
A gauge of whether consumers think it’s a good time to make big purchases dropped to 106 last month from 107 in November, Nationwide said.

‘Surprising’ Drop

"The drop is slightly surprising," David Page, an economist at Investec Securities, said today. "It may well be as people look forward to 2010, they are focusing on the issues that are still going to make it very difficult for households across the year. What concerns us and what may underlie this is the outlook for expenditure after Christmas."
Consumer spending this year will reflect "continuing economic uncertainty," Marks & Spencer Group Plc Chairman Stuart Rose said in a statement today. The U.K.’s largest clothing retailer reported a gain in holiday sales that some analysts said missed estimates, and it predicted that business conditions will "remain challenging" in 2010.
Chancellor of the Exchequer Alistair Darling said last month he will require higher tax contributions next year. This month, value-added tax returned to 17.5 percent from 15 percent, reversing a year-old measure. The Conservative opposition had a 10 percentage-point lead over Brown’s Labour Party in a YouGov Plc poll released Jan. 1.

Rainy Day Worries

"The looming VAT hike and other tax changes announced in the pre-budget report may have impacted on confidence in December, forcing people to review their expectations for the future," Gahbauer said.
Greg Hodge, an analyst at London-based industry research firm Planet Retail Ltd. said on Bloomberg Television today that the confidence report was "bad news."
"You have two types of people -- people that are looking to save for the rainy day are worried about the future, and people who sit on various mortgages who are still relatively cash-rich," he said. "Those people seem to have overridden the negative people preparing for the rainy day."
Unemployment growth is still slowing as the economy revives. A separate report today by KPMG and the Recruitment and Employment Federation showed that a measure of hiring for permanent jobs grew at the fastest pace since July 2007 in December, rising to 62.8 from 61.7 the previous month.
A U.K. index of service industries showed faster expansion in December, a survey by Markit Economics and the Chartered Institute of Purchasing and Supply said today.

Shop Prices

Meanwhile, prices of goods in U.K. shops advanced 2.2 percent in December from a year earlier after a 0.2 percent increase the previous month, the British Retail Consortium said in a separate report today. Food prices rose an annual 3.7 percent while non-food prices gained 1.4 percent.
The Bank of England will maintain its program of purchasing bonds with newly-created money at 200 billion pounds tomorrow, according to all 35 economists in a Bloomberg News survey.
Policy makers will also keep the benchmark interest rate at a record low of 0.5 percent, 53 economists said.
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