UK consumers take fright as new government warns of pain, survey shows

By William Schomberg

LONDON, Sept 20 (Reuters) - Prime Minister Keir Starmer's warnings about the state of the British economy and the likely need for tax increases in next month's budget have caused consumer confidence to plunge this month, according to a survey published on Friday.

The GfK Consumer Confidence Index dropped to a six-month low of -20 in September from August's -13, which was the joint-highest in nearly three years.

A Reuters poll of economists had pointed to another reading of -13. Instead the reading marked the biggest September drop since 1976.

Starmer and finance minister Rachel Reeves were elected in July, vowing to rebuild the economy after inheriting what they said was the worst economic circumstances since the Second World War, prompting some business leaders to complain that the message of doom and gloom could hurt confidence and growth.

Reeves has said she will strip a 200-pound ($265) annual fuel subsidy from 10 million pensioners and warned taxes were likely to rise by more than she had judged necessary just weeks earlier, before the election.

Neil Bellamy, Consumer Insights Director at GfK, said households appeared to be responding to the messages by Starmer about the need for a "painful" budget due at the end of next month and the announcement of some early cost-cutting measures.

Official data published on Friday also showed Britain's public debt had hit 100% of economic output last month, a level not hit on a sustained basis since the 1960s.

"Following the withdrawal of the winter fuel payments, and clear warnings of further difficult decisions to come on tax, spending and welfare, consumers are nervously awaiting the Budget decisions on Oct. 30," GfK's Bellamy said.

NOT ENCOURAGING

All five measures of confidence in the GfK survey - the longest-running measure of British consumer sentiment - fell this month with views on the economy over the coming year down by 12 points, GfK said.

"Despite stable inflation and the prospect of further cuts in the base interest rate, this is not encouraging news for the UK's new government," Bellamy said.

The Bank of England kept interest rates on hold on Thursday after a rate cut in August, but Governor Andrew Bailey said he was optimistic that the central bank would lower rates further.

The GfK survey of 2,003 people took place between Aug. 30 and Sept. 13.

Separately, official data published on Friday showed shoppers were in buoyant mood in August.

Sales volumes jumped by 1.0% compared with July, more than double the 0.4% increase expected by most analysts in a Reuters poll. Sales in July rose by 0.7%, up from a previous estimate.

Some supermarkets and clothing retailers reported a boost because of warmer weather and end-of-season sales, the Office for National Statistics said.

"Looking at the broader picture, retail sales have also increased across the three month and annual period, following strong growth from online retailers," ONS Chief Economist Grant Fitzner said.

"However, sales overall remain slightly below their pre-pandemic level," he said.

Sterling rose after the retail sales figures were published and was up by half a cent against the U.S dollar at 0730 GMT as investors took the data as a sign of momentum in the economy.

Following a surge in inflation in 2022 that hit consumer spending power for much of the following two years, a slowdown in price growth, faster increases in wages and an interest rate cut by the BoE in August have helped to restore some of the lost living standards.

Recent reports from British retailers had shown discretionary spending remained under pressure, with fashion retailer Primark reporting a fall in UK underlying sales in its latest quarter and B&Q and Screwfix owner Kingfisher saying demand for kitchens and bathrooms was weak.

But Next said on Thursday it had seen better-than-expected sales in the first six weeks of its second half, which reflected an improvement in the weather but "big ticket" home furnishing items remained a difficult market. ($1 = 0.7558 pounds) (Reporting by William Schomberg; Editing by David Milliken and Alex Richardson)