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Royal Wedding Masks Shaken UK Confidence

Shops have been filled with Union flags and all sorts of memorabilia ahead of the royal wedding, but the British may not be buying as much as retailers hope; research carried out by GfK shows that consumer confidence in the UK economy has fallen back to 2008 levels.

Sharon Lorimer

GfK measures public perception of the UK’s general economic situation over the last and next 12-month periods, as well as confidence in consumers’ personal financial situations over the same timescales. It also measures the public’s appetite for making major purchases.

The company’s index of all five factors fell by three points in April, to -31; it has only fallen below -30 twice in close to 40 years – in early 1990 and in mid-2008, the company says. This fall comes after an eight-point drop in January.

“It fell like a stone in January and we thought it might bounce back… but we’re now 10 points lower than we were three months ago, which is pretty bad news,” Nick Moon, managing director of GfK NOP Social Research, told CNBC.com.

UK GDP grew 0.5 percent in the first quarter of 2011, in line with the Bank of England’s expectations but there are worries that productivity will be hit by a weak performance in the construction sector and long absences prompted by the clustering of bank holidays around the Royal Wedding.

“To a broad extent, the actual economy tracks the composite [consumer confidence] index fairly well,” Moon said.

Longer term, this weakness will cast doubts over how active a role consumers can play in the upturn, Stuart Green, chief UK economist at HSBC, told CNBC.com.

Fears of Spending Cuts

The figures show that households are increasingly concerned about the government’s fiscal consolidation programme, Green said. The UK government has begun a programme of significant cuts as it seeks to trim a budget deficit that amounted to more than 10 percent of gross domestic product in 2010, the third largest in Europe.

“Fiscal consolidation has been playing an unusually prominent role in the economic perceptions of consumers,” he said, noting that UK politicians and the media have kept up a steady drumbeat of coverage on the country’s programme of spending cuts.

The anger boiled over into public displays in London in March, with protestors occupying the premises of major retailers accused of dodging corporation tax. This level of focus adds to the real concerns that consumers are facing.

“When you look at the headwinds that households are facing, households are heavily indebted, house prices aren’t going anywhere and wages aren’t going anywhere,” Green said.

British workers seem to be demonstrating a willingness to forego wage increases in favor of retaining their jobs, lowering their spending power, he added. “If there are perceptions that the economy is weak among households, they may accept lower levels of wage growth,” he said.

Bank of England policymakers are concerned by consumer confidence levels, which may impact on their decision to move interest rates, Green said. Flat wages may counteract concerns around inflation – despite it hovering at about double the Bank's target - and give the bank more leeway to keep interest rates steady, he added.

A spell of good weather and the unusually high number of public holidays may cause a temporary uplift in retail sales figures that could mask an otherwise weakened consumer sector, but the overall impact of these and any spending around the royal wedding are likely to be “marginal,” Green said.

Contact Europe: Economy

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