Scottish economic bulletin: February 2024

Consumer Activity

Consumer sentiment has strengthened over the year as inflation has reduced.

Consumer Sentiment

• The Scottish Consumer Sentiment Indicator reflects how households think the economy is performing, how secure they feel about their household finances and how relaxed they feel about spending money.
• Consumer sentiment fell sharply during 2022 to -29.4 as inflationary pressures increased and the economic outlook weakened. However sentiment strengthened significantly over 2023 as inflationary pressures reduced with latest data for December showing the consumer sentiment indicator at -7.8 (-5.1 for the fourth quarter as a whole).^[15]
• The indicator has increased 18.3 points over the year, however fell 3.2 points over the month of December and remains negative overall reflecting the concerns that households continue to have for the economy, their household finances and spending money.

• Repondents continue to report on balance that circumstances regarding the economy and their household finances are weaker than a year ago. While these sentiment indicators are generally on an upward trend, their negative scores (-9.5 and -11.7 respectively) reflect the challenging cost of living circumstances that households currently face.
• This is reflected in the spend indicator (-17.5) which remains significantly negative and reflects that respondents are not currently relaxed about spending money.

• The level of optimisim for the year ahead has improved over the year, however respondents remain less optimisic about the outlook for their household financial security than they do for the broader performance of the economy.
• Expectations for the economy are positive on balance at 3.1 points, while household finance expectations are negative on balance at -3.4 points, indicating that on balance, they are still expetced to weaken, though to a lesser extent than expectations over the past year.

Cost of Living and Spending

• The rise in cost of living and higher interest rates have progressively fed through to household decisions on spending (essential and non-essential), saving, and borrowing (including financing outstanding borrowing).
• For example, retail sales volumes in Great Britain fell 2.4% over the year to December, while sales value grew 0.6% with the divergence reflecting the pace of rising prices.^[16]

• Similarly the rise in prices and interest rates have had a significant impact on the amount UK conumers are paying for their energy costs, mortgages and other loans. In December 2023 the average monthly direct debit payment for electricity and gas was £178.79 (up 37.5% compared to December 2021), however fell 2.4% compared to December 2022.^[17]
• More broadly, the average monthly direct debit payment for mortgages was £902.77 in December (up 12% over the year and 25.7% since 2021) and £236.47 for loans (up 2% over the year and 23% since 2021).

• The sharp increase in prices has been accompanied by an increase in the direct debit failure rate (the percentage of transactions that fail due to insufficient funds), reflecting the challenges facing some household budgets. For electricity and gas payments, the payment failure rate has risen to 1.17% (up from 0.84% in December 2022), while for mortgages it has risen to 0.46% (up from 0.38% in December 2022), though has remained broadly stable since May.

• More broadly in January, the ONS Public Opinions and Social Trends survey showed that 41% of respondents were finding it very or somewhat difficult affording energy bill payments and 35% for mortgage and rent payments. For energy bills, this was slightly lower than at the same point in 2023 (c. 47%), however has risen for mortgages payments from c.30% and potentially reflects the changing composition of inflationary pressures.^[18]
• The more gradual but recent impacts of rising interest rates on mortgage payment challenges compared to energy payments, reflects the rise in interest rates over the past year but also the time it takes for the full impact of the increase in Bank Rate to be felt at an aggregate level due to the high share of mortgages that are on a fixed rate.
• Reflecting this, the ‘effective’ interest rate – the actual interest paid – on newly drawn mortgages remains elevated but fell slightly from 5.34% in November to 5.28% in December while the rate on the outstanding stock of mortgages rose from 3.27% to 3.36%. This is the first fall in newly drawn mortgage rates since November 2021, in part reflecting increased market expectations that interest rates may have peaked.^[19]

• In response to the change in cost pressures facing households, ONS Public Opinions and Social Trends survey data from January show that the most common actions people were taking in response to the increased cost of living were spending less on non-essentials (62%) and shopping around more (51%). 45% reported using less fuel such as gas or electricity in their home and 40% reported spending less on food shopping and essentials.