UK consumer mood improves

[EUROPE] UK consumer confidence has shown signs of recovery in May 2025, rebounding from a significant decline in April. The GfK Consumer Confidence Index rose from -23 to -20, surpassing economists' expectations of -22. This improvement is attributed to easing global trade tensions and the Bank of England's recent interest rate cut. However, persistent inflationary pressures and sector-specific challenges continue to pose risks to the UK's economic outlook.

Consumer Confidence Index Shows Modest Improvement

The GfK survey, which included responses from over 2,000 UK households, revealed a three-point increase in the consumer confidence index in May. Notably, all five sub-components of the index saw improvements, with the most significant gain in expectations for personal finances over the next year, which moved into positive territory. Optimism about the overall economy and willingness to make major purchases, such as furniture and household goods, also increased, reaching levels not seen since 2024.

Easing Trade Tensions Contribute to Optimism

Analysts suggest that the recent easing of U.S. trade tensions under President Trump has contributed to the improved consumer sentiment. The temporary delay of tariffs on imported goods, excluding China, has alleviated some concerns about rising prices and potential supply chain disruptions. Ipsos polling indicates that a majority of Britons (74%) agree that increased tariffs would make regular household purchases more expensive, and 64% believe that increasing tariffs would do more harm than good.

Bank of England's Interest Rate Cut Provides Relief

The Bank of England's decision to cut interest rates to 4.5% in early May has also provided a boost to consumer confidence. The rate cut is expected to reduce borrowing costs for households and businesses, potentially stimulating spending and investment. However, the impact of the rate cut may be tempered by ongoing inflationary pressures.

Inflation Remains a Concern

Despite the uptick in consumer confidence, inflation remains a significant concern. The Consumer Prices Index (CPI) rose to 3.5% in April, driven by increased costs in energy, water, and car taxes. Economists warn that persistent inflation could erode purchasing power and dampen consumer spending in the coming months.

Sector-Specific Challenges Persist

While consumer sentiment has improved overall, certain sectors continue to face challenges. Private sector activity, particularly in manufacturing, continued to contract, and business sentiment showed only a marginal recovery. The ICAEW Business Confidence Monitor for Q1 2025 reported a negative confidence reading of -3.0, the weakest since Q4 2022, driven by rising cost pressures and a slowdown in expected domestic sales growth.

The rebound in UK consumer confidence in May 2025 reflects a temporary alleviation of global trade tensions and supportive monetary policy. However, persistent inflation and sector-specific challenges underscore the need for continued vigilance and policy support to sustain economic recovery.