PwC Consumer Sentiment Survey - Summer 2024

Signs of a spending revival? Uptick in consumer sentiment and household finances

The pinch felt by consumers appears to be easing. Economic indicators – falling inflation, interest rate cuts expected later this year, and rises in wages, benefits and pensions – all point more favourably for consumers. Many are now starting to feel the impact of these macro changes and our latest survey shows household finances are now at their strongest for two years.

Consumer sentiment has also continued to climb to the highest level seen in three years, well above the long-run average of -14 (we’re typically a negative country). Our main index increased from -5 in March 2024, to zero on the weekend following the July general election. This is good news for consumer businesses: our index has historically been a reliable early indicator of future consumer spending patterns over the coming six to twelve months.

And this uptick has come at the same time as an increase in the number of consumers reporting more money left over for luxuries or savings, up from 31% in June 2023 to 34% this year. In fact, overall household finances are now in the best shape we’ve seen in over two years, with just 7% of consumers saying that they are either struggling or in trouble financially - half as many as in September 2022.

“Which of these statements most closely describes your financial situation at the moment?”

Will the current trend continue?

The improvement in inflation appears to have bottomed out, with services inflation stubbornly high and pressures on grocery and energy price inflation expected this autumn. While interest rates are falling, more than half a million households will need to renew their mortgages at higher rates in the second half of 2024 alone. There is also unlikely to be a repeat of the National Insurance cuts we saw earlier in the year.

So there is a good chance that consumer sentiment may be peaking. This would be similar to the ‘honeymoon’ in consumer sentiment we saw in 2010, directly after the last change in government.

Polarisation between socio-economic groups is narrowing

Building on the positive trend from our last consumer sentiment survey, there has been an improvement in sentiment across almost every demographic group.

Sentiment across lower socio-economic groups climbed more than other segments. The most likely drivers for this? Cuts to the National Insurance rate and April’s rise in National Living Wage and benefits which disproportionately benefited these groups.

Meanwhile, sentiment across the most affluent was the only socio-economic group to see a decline, for the first time in two years, from +23 in March to +21 in July. When asked about how ‘healthy’ their household finances are, it was only the most affluent groups that reported a decline when compared to last quarter.

This means the gap between the most and least affluent, which we saw widen in the past year - to the biggest gap in the 16 years since we started measuring consumer sentiment - has started to close.

Balance of opinion by age group

Balance of opinion by socio-economic group

What has this done to spending intentions?

Looking ahead to spending, consumer intentions have improved across almost every category when compared to this time last year, as well as when looking at last quarter’s data. The strongest improvements since the spring were in grocery, holidays and fashion.

Grocery, in particular, has seen an uncharacteristic increase in spending intention, with 38% of consumers expecting to spend more on grocery shopping over the next 12 months, and only 15% expecting to spend less. Interestingly, of all the non-discretionary categories, grocery is the only one that has seen improved spending intentions, as spending on children and pets has remained relatively immune to cutbacks over the past two years.

While higher expected grocery spending was previously a result of higher prices, 12-month grocery price inflation has fallen from a high of 19.1% in March 2023 to 1.5% in June 2024. Therefore, the latest results appear to support a reversal of the lower volume and trading down trend we saw during the cost-of-living crisis. The recent success of premium grocery lines has also been helped by consumers cutting back on eating out and treating themselves at home instead, a trend likely to continue given higher inflation in hospitality prices and weaker consumer spending intention on eating out, according to our survey.

Away from non-discretionary, our most recent survey saw a bounceback in spending intention on holidays after falling out of the top five categories in March. Historically, holidays have been prioritised over other categories in January, traditionally the time when summer holidays are booked. However, with an increasing trend towards last-minute holiday bookings, this category has leapfrogged health and home since our last survey. The “four H’s” of holidays, health, home and hobbies are now consistently the most prioritised discretionary spending categories.

Further down the priority list, clothing has underperformed consistently, with fashion retail sales volumes declining every month since last September 2023, not helped by an unseasonably warm autumn last year and the cooler and wetter spring this year. However, our latest survey has seen clothing leapfrog technology and big ticket items compared with previous surveys.

With the improvement in clothing spending intention, shoppers appear to be acknowledging that refreshing their wardrobes may be overdue. This is particularly true for the under 25s, with fashion being a top 5 spending priority with a net spending intention of +6. Fashion spend has also been helped by the last minute holidays mentioned above. With weaker comparatives and hopefully improving weather, the outlook may be more favourable for fashion retailers in the second half of the year.

Consumer spending intention by category, July 2024

“How do you expect your spending to change in the next 12 month?”

A positive outlook but households still cutting back

Positive spending indicators must be contrasted with the short-term spending cutbacks that have not improved since last summer. Despite stronger finances almost across the board, consumers are still being careful with spending, with the same number of people (72%) planning to make spending cutbacks in the next three months as when we asked at the same time last year.

There are even signs that the more affluent are being more careful with their spending, with increasing numbers of the most well-off socioeconomic groups cutting back compared with earlier this year. In fact almost as many of the most affluent (76%) are planning to make a cutback as the least affluent (77%).

Proportion of consumers planning spending cutbacks in the next 3 months

Early Christmas cheer?

While it’s still early for most of us to be planning for Christmas, early indications are cautiously positive for festive spending. In our July survey, 20% of consumers said they planned to spend more on Christmas shopping and celebrations this year compared with last year, while 21% said they planned to spend less. Younger people were particularly optimistic about their planned festive spending, with 46% of under 25s and 33% of 25-34 year olds planning to spend more.

Although that doesn’t appear to be a resoundingly positive response, it’s a material improvement on our survey last September, when 18% expected to spend more vs. 30% spend less. In addition, our experience is that spending intentions actually become more positive the closer we come to Christmas, and the more front-of-mind Christmas plans get.

The only caveat to this optimism is that slightly more people say they are planning to go away over Christmas, either on holiday or to visit family abroad, while fewer are planning to host extended family at home. This suggests there might be fewer presents to buy, and that some of our festive spending may be directed abroad, in line with the trend of consumers prioritising holidays over other discretionary spending.

What does this outlook mean for operators heading into the Golden Quarter?

For now, consumer sentiment has returned to its improving trend and is now well above the long-run average. Household finances are in the best shape they have been in two years, with more households able to spend on luxuries and fewer struggling. Inflation has fallen to the Bank of England’s 2% target. Wages are growing faster than inflation, and have been for over 12 months now. Interest rates are expected to be cut by the autumn, and mortgage rates are also falling in anticipation of this. With people looking to prioritise Christmas and a spending intention on presents and celebrations better than last year, things do look positive for going forward, particularly in light of generally weaker trading comparatives from 2023 and 2022.

While these indicators point to a more favourable end to the year for retailers, they need to be balanced against positive - but still lacklustre - spending intentions. In particular, while consumers are buying more and trading up in some areas such as grocery, just as many of them are expecting to cut back in other areas. They are also still prioritising holidays and other experiences more generally than on buying physical items, with big ticket, home and technology spending intentions still lagging.

As a result, there is no guarantee that improving sentiment will translate into higher spending. Given the more favourable macro environment, there will certainly be opportunities for savvy retail and leisure operators to steal a march on their peers. However, with consumers still being selective about where they spend - and where they cut back - not all operators will succeed.