Kate Hughes: Could a summer of jubilation be the ultimate financial confidence trick?

 

So, how are we all feeling? Still buoyed by simply being part of the land of pomp and pageantry? Or just happy another two days off work came around so quickly? Despite eurozone implosion fears and other minor irritations we all seem really quite upbeat.

Equities posted their biggest one-day gain in six months this week, catching up with the rest of Europe after a weekend in which jubilee revellers each spent £40 extra (Moneysupermarket.com), splashing out on a Victoria sponge and a bit of bunting, and throwing off the cautious saving mentality – at least temporarily.

And it's all far from over of course – what about the impending "Greatest Show On Earth" or the endorphin hit on offer from your much-anticipated annual break? Do I dare even whisper it, even a bit of summer sunshine here in Blighty?

So could the feel-good summer of 2012 give consumer confidence a boost despite wider economic gloom? And could that confidence have a real effect on the ground?

"There is some evidence that the jubilee might have a marked effect on consumer confidence," says Nick Moon, who is managing director of Social Research at GfK.

"There was certainly an unexpected pick-up during the royal wedding last year, when the consumer confidence index went up by 10 per cent. It lasted about three months and can't really be explained otherwise.

"This year, with the Olympics coming up and even the positive effect of good weather, we could see any upturn maintained for longer."

Crudely, if we're more confident we spend more, and because consumer spending drives about 60 per cent of the UK's GDP, this key measure of the health of a nation's economy typically picks up two or three months after the consumer confidence – in turn affecting stock markets, government policy, etc.

Plus inflation is down slightly, so the relentless squeeze on our pockets is, we're told, lessened, and interest rates are highly unlikely to shift from rock bottom for quite some time.

In fact, GfK's latest poll shows that we haven't been this least downbeat about the economy's coming 12 months since last June and consumer sentiment surrounding our finances specifically has improved.

Granted, we are technically in a double dip and in its last economic forecast, employers' body, the CBI, expected growth to be flat in the second quarter of 2012 due, in no small part, to the financial hit of the extra holiday. "However, there will be an improvement in the second half of the year, reflecting an improving global economy and an expected easing in inflationary pressures, plus a slight boost from the Olympics and a bounce back from the second quarter."

So the Queen being on the throne for 60 years could ultimately give the nation's pensions a shot in the arm and improves employment prospects among other things, right? Excellent.

But then what about the real world? Is it true that fears over eurozone instability aren't translating into consumer confidence figures because the man in the street doesn't understand the impact a collapse would have on these islands?

Ian Kernohan, economist for RLAM, says: "Setting aside the obvious downside risks from Europe, the UK economy certainly looks down, but far from out.

"However, none of this matters if the situation in the eurozone deteriorates to the point of disintegration. In the event of a euro break-up, the severe hit to nominal GDP growth would lead to significantly lower tax receipts and higher government spending, with little chance of meeting the Coalition's fiscal mandate on the structural current deficit or the supplementary target on debt.

"[But] the UK is viewed as a sovereign state, with its own central bank, issuing debt in its own currency and with no record of default. For many investors, this is still an attractive proposition in an uncertain world."

None of this positive sentiment is a surprise for independent think tank British Future, whose investigation into British sentiment, State of the Nation 2012, earlier this year found that "quiet hope in anxious times captures the British mood".

Apparently, "we are fully aware of the perils facing the British and European economies, but refuse to let that entirely dominate the year ahead. We are pessimistic about where the country is heading yet confident that the places we live in will be resilient and pull through.

"This stubborn optimism reminds us that, when we look back, whatever happens on the world stage may be trumped by the personal milestones of births and weddings, pride in educational or career achievements, memories and loss at funerals too," says British Future.

"We believe that this will be a year of shared hope too, as we anticipate great national celebrations that will resonate for a generation."

kate.hughes@fitforprint.co.uk

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