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Cost of living squeeze drives confidence to historic low

The ongoing squeeze on consumers’ spending power intensifies as prices continue to rise at double-digit rates. As a result, consumer confidence fell to a historically low level of -20% in Q3, marking a fifth consecutive quarter of decline in consumer sentiment, according to the latest Deloitte Consumer Tracker, our consumer sentiment survey carried out with a nationally representative sample of over 3,000 UK adults.

Consumers cut back to curb costs

Both day-to-day and non-essential spend declined for a second consecutive quarter in Q3, indicating that consumers are cutting back across all areas of spending. One in three consumers said they are now spending less, up from one in five at the start of the year. Of these consumers, 58% said they are spending less specifically to save money.

Consumers are changing their habits to combat rising costs, with over half (57%) reducing their home energy consumption. Two in five (40%) are also spending less on clothes and shoes, and one in five (22%) have ended, or intend to end, their subscriptions to entertainment services.

Consumers turn to reselling, and shopping in the second-hand market

While we are seeing consumers reducing their overall spend, some are also trying to boost their income by reselling items they no longer need or use. Our data shows that one in five consumers are selling items on reseller platforms in Q3 to cope with the cost of living crisis. Consumers are also interested in buying second-hand items as a way to save. Of those consumers who spent less in Q3, 16% claimed to have bought more second hand or refurbished items in Q3, this is twice the number of people that did so during the same period two years ago.

Growing interest in the second-hand market over the last two-years is not only due to the current economic environment but also part of an overall trend among some consumers, especially younger ones, to adopt a more sustainable lifestyle.

Consumers stay home to reduce leisure spend

Two in five (39%) consumers said they are spending less on going out and on leisure activities to manage cost. As a result, net spend across leisure fell in Q3, as consumers eat out less, and limit their visits to coffee shops, pubs and bars, and to culture and entertainment venues. One exception, attending sports events, was the only area of leisure to see a quarter-on-quarter improvement. This follows a busy period of sporting events, many of which have returned to live audiences.

The hospitality industry has been one of the hardest hit in recent years. As consumers assess their budgets amidst rising costs, many are having to prioritise spending on essentials, directing money away from the discretionary categories, including leisure. Many hospitality businesses are already feeling the effects of lower footfall, while also having to counteract rising running bills themselves. Unfortunately, the picture does not appear to get any better as we enter the festive period, when many of these businesses will be counting on celebrations and large gatherings to recoup their losses. According to our data, consumers plan to continue to spend less on leisure in Q4 2022, with intended net spend down across all leisure categories.

Consumers remain pessimistic on state of the economy

Consumer sentiment towards the state of the UK economy lifted slightly in Q3, however, this remains lower than when COVID restrictions were introduced in the UK back in Q1 2020. Our data also shows that despite unemployment at a 50-year low, consumers are increasingly concerned about their job prospects with confidence in job opportunities declining for the third consecutive quarter. This comes at a time when CFOs of the UK’s largest firms attach a 78% probability to the UK falling into recession in the next 12 months.

Look ahead to the next quarter

In terms of the spending outlook, our data shows that consumer spending will continue to decline in Q4 2022, which does not bode well for the retail sector ahead of the Christmas period. Although there was hope that consumers would have had a strong desire to return to normal patterns of celebrating this Christmas, for many households, especially those on low-income, higher food and energy prices will impact their ability to spend. Consumers will take affordability into consideration when spending on gifts and get-togethers this year. Nearly half of the consumers (46%) intend to buy more gifts on discounts or on sale this year. As a result, a more competitive promotional climate is likely as discretionary spending continues to weaken.

Faced with the painful combination of slowing consumer demand and rapidly rising input costs, many businesses are adjusting their plans for the months ahead. There are several things consumer businesses can do to manage volume losses while fighting to preserve consumer loyalty. Price will be a key battleground, but with rising labour and input costs businesses cannot reduce prices without sacrificing margins. As a result, we will likely see reduced product sizes or amounts to maintain price points.

Businesses will also have a renewed focus on product profitability and the commercial terms they have in place. Ultimately, some products may not be sufficiently profitable and could be removed from businesses’ product portfolios altogether.

Christmas, New Years, Halloween, bonfire night, autumn half-term or the men’s World Cup, should all be offering consumers the opportunity to spend across the services sector in Q4. However, with the reality of the cost of living crisis, consumers expect to spend less across all leisure categories in Q4, with the biggest declines expected in long and short holidays, each down ten percentage points.

The leisure sector will be disproportionately impacted as consumers are likely to prioritise essential spending in the quarter ahead. At the same time, the sector is also coming under significant cost pressures as well as struggling with staff shortages. With a higher rate of inflation compared to other sectors, the hospitality industry has had no choice but to pass on some of those cost increases onto consumers.

Beyond 2022, we expect the contraction in consumer demand to accelerate across all demographics with the under 30s most impacted. While the 2022 forecast for consumer expenditure growth is expected to be nearly 5%, in 2023 the consensus forecast shows much slower consumer expenditure with a contraction of nearly -1%. However, these expectations might need to be reviewed given the UK’s uncertain economic prospects, including the acceleration in the cost of borrowing, rising taxes and a predicted weakening in the housing market. Such uncertainty could further impact consumer confidence and result in a more severe slowdown in consumer spending than predicted.

For more insights on the Consumer Tracker, see The Deloitte Consumer Tracker Q3 2022, or to interrogate the data we have collected for over 10 years visit the Deloitte Consumer Tracker data explorer tool.