UK consumer morale ticks up but Middle East conflict clouds outlook

UK consumer confidence rose to -18 in June, the highest level since December 2023, driven by improved sentiment about the economy, according to GfK. However, the index remains below its long-run average and lower than a year ago, while rising Brent crude prices due to Middle East tensions pose a threat to the outlook, potentially impacting petrol prices and inflation, against which the Bank of England remains vigilant.

Analysis

British consumer confidence, as measured by GfK, improved to -18 in June from -20 in May, marking its highest level since December and surpassing economists' expectations of an unchanged reading. This rise was primarily driven by an improved sentiment regarding the broader economy. However, this headline figure remains below the long-run average of -11 and is lower than the same period a year ago. Critically, indices tracking personal financial confidence, which are considered a more reliable predictor of consumer spending, remained flat. A significant headwind is the escalating tension in the Middle East, which has contributed to a roughly 20% increase in Brent crude oil futures since the end of May. This poses a substantial risk for the UK, which already contends with some of Europe's highest energy prices and the region's highest headline inflation rate. The Bank of England has explicitly stated its vigilance concerning inflationary risks stemming from this conflict. GfK's consumer insights director, Neil Bellamy, highlighted the impending rise in petrol prices and ongoing uncertainty surrounding tariffs as potential negative impacts on consumers. Furthermore, official retail sales data for May, due shortly, are anticipated to show a decline in sales volumes, contrasting with an unexpected surge in April that was partly attributed to favorable weather.

Key Decisions for Investors

• Investors should exercise caution regarding UK consumer- discretionary sector exposure, given the flat personal financial confidence and significant inflationary risks from rising energy prices despite improved headline sentiment.
• Closely monitor upcoming May retail sales figures for a clearer indication of actual consumer spending, as this will provide crucial data against the backdrop of potential energy price hikes.
• Track Brent crude oil price developments and geopolitical escalations in the Middle East, as these factors are pivotal to the UK's inflation outlook and could quickly erode consumer confidence.
• Pay attention to Bank of England communications regarding inflation and potential policy responses, as this will directly impact borrowing costs and economic stability.