The one measure that can tell us a lot about the state of the UK economy

A new year, a new beginning.

The latest monthly figures on the economy hardly confirm a change of gear, but nor do they back up the worst doom-mongers claiming decline and recession. It is neither doom nor boom, but a new year makes an opportunity to wipe the slate clean on policy, on a sense of certainty, and perhaps above all, the vibes in the economy.

There is one chart that might explain quite a lot about both the state of and the prospects for the UK economy. And it might say a fair bit about the political direction of the UK too.

It is consumer confidence. These are the long-running surveys that essentially put the nation on the economic psychiatric couch. How do you feel about the economy’s prospects? Are you likely to buy a major piece of equipment? How are your personal finances?

There is a solid data source of consistently asked questions going back five decades – it is the measure now called the GfK Consumer Confidence Barometer.

I’ve been reporting on this metric for half of its existence. It’s an imperfect science but the basic idea to reach the net confidence number is the optimism score minus the pessimism score.

The patterns then were interesting and consistent. And it was important as a predictor for those in power to stay in power. “It’s the Economy Stupid”, remember.

But has something significant changed in the water? This chart is quite extraordinary and a version of it has been circulated at the top of government.

A quick narration is in order.

This chart breaks down the headline net confidence number by age cohort.

Broadly speaking they used to move together, they were “correlated”.

Younger people have a generally sunnier starting point but that dims as they age – not a great surprise – and all age groups react to events similarly.

Over the past decade you can see correlated declines in consumer confidence across all age groups in reaction to the post-Brexit vote era and the impact of the pandemic.

The clear impact of the Russia-Ukraine war and the extraordinary rise in energy prices can be seen.

An interesting takeaway is how devastating the Liz Truss mini-budget in 2022 was for all age groups. A loss of confidence in the 45-day government and in economic prospects.

And up until 2024 all those lines move in tandem.

But what happens in late 2024? Divergence. Big time.

The under-50s’ consumer confidence goes higher, and soars for the under-30s to highs not seen since Brexit.

But take a look at the bottom two red lines. Over-50s’ and over-60s’ consumer confidence collapses toward Truss-era levels.

How can it be that the over 50s, and pensioners in particular, are living through another collapse in economic confidence, and yet the young adult population is much more positive?

Well the dotted line is the 2024 General Election. And while correlation does not mean causation, that is when this age-related break occurs.

A possible explanation from political economy is this – the flow of causality from economic sentiment to political sentiment has reversed.

Where how you felt about your finances influenced how you voted, now how you voted influences how you feel about your finances and the economic outlook for the country.

Young people broadly on the liberal left are now happier after enduring a rolling series of crises so far this decade, and with a government they largely voted for in 2024.

The older, who voted Conservative and Reform predominantly, are unhappy and unconvinced. They think the country has gone to the dogs even more than usual.

One possible factor is the tone set by social media and the emotive doom-scrolling and rage magnets embodied in their algorithms. Is this demographic seeing the Mad Max-style dystopia presented on their social media feeds and responding with this negative outlook?

There is also some evidence in the US of respondents to one consumer sentiment survey exhibiting a political tint on their sense of economic confidence. In the transition between the Donald Trump and Joe Biden administrations at the end of 2020, Democrats respondents’ economic confidence surged from 67 to 96, while Republicans’ crashed from 100 to 59.

The Biden administration then bemoaned what staffers called the “Vibecession” – the subsequent sense of economic malaise not really reflected in good economic numbers.

There are other economic factors at play.

This rebound in confidence for the young coincides with when the Bank of England started cutting interest rates. Rate cuts are good for young home seekers and jobseekers, but bad for older savers.

There are significant economic consequences if this picture is correct too.

It might help explain the curiously high and nearly double-digit UK savings rate. That looks like a pandemic-style aberration. Older Britain is sat on its savings, despondent about the country and the economy, refusing to spend its money and weighing down GDP, even as pay rises for workers remain higher on average than the rate of inflation.

The takeaways from this chart are also well-reflected in the early financial results we are getting from businesses.

Many retail results have defied the gloom. Some bosses that complain the most about National Insurance rises seem to be reporting healthy sales and profits having basically paid for the tax.

Pub chain Mitchells & Butlers “traded very strongly across the festive season with like-for-like growth of 7.7%”. Fullers had an “outstanding five-week Christmas and New Year season across all parts of the estate”, 8% up on an already strong festive period last year.

Obviously challenges remain in the level of price rises. But inflation is on its way down to the 2% target, with a conscious attempt from government to limit regulated price rises for rail and water.

More rate cuts will come slowly, and the impact of previous cuts will also filter into the household sector.

A mortgage price war may be on its way to help a housing market rebound after months of Budget uncertainty.

The government will hope to draw a line under a tumultuous 2025, with what they hope is an investment boom typified by recent announcements on Heathrow and on a new northern train line.

So there’s a platform to defy the doom. But could people’s now politically charged perceptions of economic confidence be a brake on all that?