Merryn's Blog

A growing crisis in confidence

The Nationwide Consumer Confidence index is now at its lowest level since May 2009. That could mean stockmarkets are heading for a major pullback.

The Nationwide Consumer Confidence index does what it says on the tin. Each month, it measures the UK population's view about the country's current position and its future prospects. It also gauges how upbeat Britain's consumers are about their own finances.

What's the latest?

It makes painful reading. July's overall consumer confidence figure fell for the third month in a row to its lowest level since May 2009. Even worse, the Expectations index, which looks forward six months, has plunged to its weakest since last April.

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"July will have been a time for many to reassess their individual circumstances following the Chancellor's emergency Budget", says Nationwide's chief economist, Martin Gahbauer. "There appears to be growing concern among consumers as to their level of disposable income in the months ahead".

With prices rising too fast for comfort as well, this suggests lots of Brits will soon be running low on cash. That'll be bad for general retailers in fact for any companies that depend on consumer spending.

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What does this mean for the UK stock market?

The chart below shows the Nationwide Consumer Confidence index, advanced by one month, compared with the FTSE 100 index.

10-08-11-NWconfidence

Source: Bloomberg

Sure, the FTSE 100 contains plenty of firms that get much of their business from outside Britain. So they ought not to be too badly hurt by a UK domestic-spending slowdown.

But look how the Nationwide index has pointed the way for UK shares since the financial crisis started over three years ago. Plummeting consumer confidence has clearly hit the market's self-belief too.

On this measure, the FTSE could soon suffer a major pull back.

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