Huge slump in consumer confidence

Consumer confidence took its biggest knock for nearly 20 years after the VAT hike earlier this month, leading to warnings that the UK economy could be facing “a very painful period”, a survey has found.

There was an “astonishing” eight-point fall in a key measure of consumer confidence to minus 29 between December and January, the biggest monthly drop since the 1992 recession, according to the survey by GfK NOP Social Research.

All the confidence measures recorded by the survey dropped over the past month but the biggest fall was in the score representing consumers’ willingness to make major purchases, which slumped 22 points to minus 29.

The index representing people’s expectations for their financial situation over the next year slumped to minus 12, which is 16 down on a year ago, while the score for people’s expectations for the economy over the next year was at minus 30, compared to minus two a year ago.

The firm’s managing director Nick Moon said that with more Government austerity measures to come and prices still set to rise, talk of a double-dip recession was “unavoidable” following the surprise contraction in the UK economy in the final three months of 2010.

Mr Moon said: “The VAT increase is the first of the Government’s austerity measures that has had a widespread impact on consumers, and it seems to have hit people’s economic confidence hard, especially as the biggest drop was in consumers’ appetite for major purchases. With inflation on the up and the full force of the cuts yet to hit, these figures could be the beginning of a very painful period.

“There is a chance that these figures represent a post-Christmas blip but even if there is a rally in February it is extremely unlikely that it will reverse this massive drop.”

It is only the sixth time in the 35-year history of the survey that there has been such a collapse in confidence, he added.

The figures are the latest in a series of bleak statistics for the UK economy. Earlier this week, the Office for National Statistics revealed that GDP took a shock 0.5% drop in the final three months of 2010 as the Arctic weather caused widespread disruption in December.

And business body CBI revealed retailers’ sales growth slowed in January. The news dampened hopes that the sector would bounce back after the ONS said sales declined 0.8% in the previous month, making it the worst December on record.