Fear of job redundancies, the imminent winding down of the furlough scheme, and concerns about health risks have taken a toll on consumer confidence.
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The Household Finance Index from leading data provider IHS Markit fell to 40.8 in August from 41.5 in July, as the financial strain on households stemming from the ongoing COVID-19 pandemic became more evident over the past month. For reference, a figure above 50 indicates an improvement in household finances.
The index, which measures households’ overall perceptions of financial wellbeing, has already been deteriorating over May, June, and July. This latest drop signals a significant erosion of consumer confidence in the future outlook of the UK economy.
Households also recorded a further reduction in overall spending in August, on the back of the decrease in incomes received from employment. While the rate of decline of both of these figures has eased further from previous months, it still suggests that consumers are not yet comfortable with spending on anything other than essential items.
IHS Markit economist Lewis Cooper said of the latest survey, "Overall, the data hint at some worrying trends when put in the context of the significant recession facing the UK. Although lockdown measures are looser; households are spending less, earning less and unsure about their jobs, all of which has the ability to add severe friction to the pace of the economic recovery."
The heightened sense of anxiety around household finances has been primarily attributed to the increasing number of job redundancies that are expected in the coming months. In October, the government is expected to wind down its furlough scheme, which has enabled small businesses to provide support to millions of workers.
The removal of this financial support is expected to result in a wave of lay-offs, pushing the unemployment rate to unforeseen levels. Earlier in August, Governor of the Bank of England, Andrew Bailey painted a grim picture for UK employment after the end of the furlough scheme, projecting that the unemployment rate could hit 7.5% or even worse by the end of the year.
While the unemployment rate has evidently remained steady at its pre-pandemic levels of 3.9% throughout the crisis, experts caution that the numbers are a smokescreen and do not reflect the reality.
Indeed, a large number of workers who are currently not working, for all intents and purposes, are still counted among the employed, due to technicalities in the definition of joblessness. Additionally, furloughed workers are still considered as employed – a number that does not reflect in the unemployment rate.
Despite lockdown restrictions being eased over the past month, the latest figures from IHS Markit are a setback to hopes for any signs of a sustained recovery in consumer confidence in the months to come.