By Daniel Hunter

Consumers’ confidence about their level of disposable income is at its highest since the Deloitte Consumer Tracker began in Q3 2011. While sentiment remains in negative territory, the index rose to -25% in Q3 2013, from -43% in Q3 2011.

Other measures of confidence have also significantly improved this quarter in contrast to this time last year, continuing an uptrend that has been underway for the past 12 months. The Deloitte Consumer Tracker has seen concern regarding job security halve to -5% in the last year (-10% in Q3 2012). In addition, 11% of consumers report that someone in their household has started a new job in the past three months, compared to 7% this time last year (Q3 2012).

Ian Stewart, chief economist at Deloitte said: “Overall confidence is growing and has been for the past year. The Tracker shows consumers are more positive about job opportunities and job security. This is in line with recent figures showing record levels of employment and falling unemployment. Less downward pressure on incomes, combined with renewed economic optimism and an improving housing market make for a story of gradually recovering confidence - notwithstanding the fact that the level of real incomes is continuing to fall.

“Official data shows earnings rose by 0.7% over the last year, far slower than the rise in the index of inflation and taxes at 2.2%. Therefore, the squeeze on consumer spending power continues. Far more consumers are pessimistic about incomes than are optimistic and our index of disposable income remains in negative territory.”

Consumers report that over the last two years there has been some easing of upward pressures on the price of essentials such as groceries and transport. Consumers are also becoming more positive about the outlook for spending on discretionary items. Over the past two years, net spending on ‘going out’ and on holidays has improved by 11 points (at -20% in Q3 2013 vs. -31% in Q3 2011 and -4% in Q3 2013 vs. -15% in Q3 2011 respectively).

Consumers are also positive about the outlook for 2014, with expectations of a net rise in the value of their properties climbing from -1% (Q3 2012) to 24% (Q3 2013).

Nevertheless, there remains a significant gap in the rate of recovery between the cautious consumer market and the rapidly strengthening corporate sector. Deloitte’s latest CFO survey found corporate appetite for risk has reached a six-year high, whilst uncertainty hit a three-year low.

Stewart continued: “Rising consumer confidence seems to reflect optimism about the economy, a stronger jobs market and a better outlook for housing. The central problem for UK consumers remains, as it has for the last three years, declining spending power. After taking out inflation and tax changes, earnings have fallen by about 1.5% in the last year. This actually represents an improvement compared to the fierce income squeeze of 2010 and 2011, but it leaves consumer spending power on a declining path. The key to a sustainable recovery in consumer activity is falling inflation and a pickup in earnings.”

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