The UK is suffering from a “vibecession” ahead of the Budget, according to PwC, with household sentiment deteriorating despite improving economic fundamentals.
The firm’s latest consumer sentiment survey dipped to -8 at the end of September, its lowest point this year. The survey briefly reached neutral in July, meaning the quarterly fall in confidence was the largest since spring 2022.
The deterioration was led by over 65s, who became the least optimistic age group for the first time since 2016. This likely reflects changes to the winter fuel allowance, announced back in July, as well as rumoured changes to tax reliefs on pension contributions.
Experts at PwC noted that the fall in consumer sentiment came even though the outlook for households has improved in recent months. Households have seen rising real wages as inflation has continued easing, while further interest rate cuts are expected in the months ahead.
Actual household finances have deteriorated only slightly, the firm said, with a small increase in the number of spending cutbacks planned in the short-term.
The firm suggested that the UK might be experiencing a ‘vibecession‘, when there is a disconnect between positive economic data and negative consumer sentiment.
“Despite falling inflation and interest rates and consumers being better off, sentiment has started to fall again,” Lisa Hooker, leader of industry for consumer markets said.
The drop in confidence is likely fuelled by anxieties surrounding potential tax hikes and benefit reductions, PwC said. Hooker said consumers had “trepidation” ahead of next week’s Budget.
Chancellor Rachel Reeves has repeatedly said that she will have to take “difficult decisions” in the Budget and is reportedly looking to raise £40bn, weighted heavily towards tax rises.
She is likely to force employers to pay national insurance on pension contributions and may extend the freeze on tax thresholds, which would mean more people end up paying higher taxes due to fiscal drag.
PwC’s report is the latest survey to show that consumer confidence has fallen sharply since Labour took office in July. Many economists have said that the government’s rhetoric has been excessively gloomy, which has impacted investment and spending decisions.