Consumer confidence continues to drop

School’s out and Britons are heading off for their summer holidays. Just the time, you would expect, for a more cheerful overall mood. Think again.

Consumer confidence is continuing to weaken and life is getting tougher on the high street.

There may have been no significant drinks sector collapses since Oddbins in the early spring (the creditors are still waiting for even a hint of a payout) but the string of retail failures in other sectors has been mounting and recent comments from Asda’s financial director about consumers “being in recession” served to reinforce similar sentiments from Sainsbury’s a few days earlier.

Even those retailers reporting increased like-for-like sales against last year are doing so on the back of bringing forward their summer sales.

In the drinks sector Britvic yesterday reported an 8.2% slump in the soft drinks market in the past four weeks while Mitchells & Butlers announced continuing dismal figures for its third quarter.

A swathe of indices published over the past week or so confirms the anecdotal evidence that retailers’ tills are ringing only mutedly. Footfall is falling and shoppers are seeking out discounts as never before, which – ironically – is a key reason for the surge in internet transactions.

This week the Federation of Small Businesses published its latest survey on confidence. Its members were less optimistic at the end of June than at the start of the year, with the only regions reporting stagnation or a mild rise being the east of England and the East Midlands – areas that have already been severely hit by the consumer spending downturn.

Nationally, confidence among proprietors of hotels, restaurants and bars slumped by nine points in the second quarter (from a balance of +13 to +4).

Meanwhile, Nationwide this week published its confidence index, which charts attitudes about the economy and personal prospects as well as employment levels.

This was at an almost record low, while the associated spending index fell by six points as disposable incomes were squeezed by the tax changes that came into force in April. Asda’s latest income tracker puts the average family’s disposable income at just £167, £9 per week lower than in June last year.

Last week’s National Accounts confirmed that trend, showing that consumers’ real disposable incomes fell by 0.8% in the first three months of the year, with the annual drop of 2.6% the biggest since 1977. And the pressures from weaker consumer spending are only likely to intensify.

What’s to be done? We knew the cuts would be painful and most businesses have given up hope of altering the Chancellor’s tactics to put Britain back on a more stable financial footing. But the Federation of Small Businesses has come up with an idea that it reckons would be tax neutral – Osborne would be giving away nothing if he took it up.

The Federation suggests that VAT on goods and services in the tourism sector (presumably including alcohol) should be cut temporarily to 5%. It believes the extra business that would be generated would be sufficient to replace the tax “lost” by cutting the rate from 20%.

There are precedents. Ireland cut VAT on hotel accommodation and food to 9% from the beginning of this month while Germany reduced VAT on hotel bills from 19% to 10% 18 months ago. France has levied VAT on restaurant bills at just 5.5% for more than two years.

The benefit to drinks companies would be marginal but don’t hold your hopes high. The Treasury is unconvinced that it wouldn’t lose out.

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