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Roadmap out of lockdown fuels record jump in consumer confidence

The first three months of 2021 saw a record quarterly rise in consumer confidence, rising six percentage points in the first quarter, to -11%, according to the latest Deloitte Consumer Tracker. Every measure of confidence saw both year-on-year and quarter-on-quarter growth, as consumers journey out of lockdown with a spring in their step.

Deloitte’s analysis is based on responses from more than 3000 United Kingdom consumers between 19th and 22nd March 2021, as the United Kingdom’s phased lockdown easing remained on track.

After entering the year under the tightest of lockdown restrictions, the reopening of schools helped boost sentiment around children’s education and welfare to -11%, up six percentage points on the previous quarter. Coupled with the continued speed of the United Kingdom’s vaccination programme, sentiment around health and wellbeing improved eight percentage points, to -26%, the highest level since the start of the COVID-19 pandemic.

With restaurants and physical non-essential retail remaining closed in Q1 2021, consumers’ pockets improved this quarter. Household disposable income saw a seven percentage point boost to -10%; marking a 17 percentage point improvement compared to the same period last year. Further, consumers’ confidence in their level of debt has tipped over to the black, at 1%, for the first time in ten years.

Ian Stewart, chief economist at Deloitte, commented: “The United Kingdom is primed for a sharp snap back in consumer activity. High levels of saving, the successful vaccination rollout and the easing of the lockdown set the stage for a surge in spending over the coming months.”

Economic recovery

The start of the pandemic in Q1 2020 saw economic sentiment plunge to an historic low. However, armed with a clear map out of lockdown, extended furlough support through to the autumn, and the vaccination programme continuing, consumer sentiment on the state of the economy grew to -61%, a quarterly rise of 12 percentage points.

With CFOs also hiring at their highest levels for nearly six years, consumers are optimistic about both their job security, and opportunities and career progression; each up by six and seven percentage points, respectively.

Stewart continued: “The eventual peak in unemployment looks set to be far lower than had been feared, and far lower than following any downturn in the last 30 years. With employers anticipating a return to the office by Q3 2021 life should start returning to something which, though far from normal, is closer to it. The risk to this upbeat outlook is the emergence of new, vaccine resistant variants and a third wave of cases. With global case rates rising we’re not completely out of the woods.”

Consumers signal a Q2 spending spree

In an encouraging sign that consumers are preparing for further lockdown easing, discretionary spending grew this quarter, albeit by one percentage point. While net spending in most of the discretionary categories remain below where it was a year ago, there was strong quarterly growth in demand for holidays and categories related to socialising, such as going out and eating out.

With late June earmarked for the last of social distancing measures to lift, consumers expect to increase their spending across almost every essential and discretionary category. Net discretionary spending is anticipated to become positive for the first time, meaning the number of consumers expecting to spend more exceed those anticipating to spend less.

Reflecting consumer eagerness to spend, ‘going to a shop’ topped the list of leisure activities consumers are most likely to do after lockdown, with 63% saying they’d plan to return within a month of measures lifting.

Ben Perkins, head of consumer research at Deloitte, commented: “Although April 12th marked what many hope will be the permanent reopening of non-essential retail stores, mass remote working will continue to impact footfall on the High Street. Shopping behaviours have changed significantly during the pandemic, with some consumers discovering the convenience of online retail for the first time. It’s likely that many of these changes will continue beyond the end of the pandemic. Whether shopping online or in-store, though, if consumers remain confident about their income, then an increase in consumer spending could become the driving force for growth as the economy reopens.”

Consumers head out, but remain hesitant about large events

With the exception of spending on in-home entertainment – up one percentage point in Q1 2021 – overall leisure spending this quarter remains well below year-on-year comparables. However, with lockdown restrictions beginning to ease, consumers are gearing up for a long-awaited return to hospitality and holidays.

Whilst limited to takeaway options over this period, eating out saw the biggest quarterly rise in net spending, up ten percentage points, to -43%, followed by drinking in pubs and bars; up nine percentage points compared to the last quarter.

Simon Oaten, partner for hospitality and leisure at Deloitte, said: “Consumers embraced a brief cold snap this quarter, by heading to parks for picnics and takeaway coffees, for a chance to socialise with other households. With more restrictions lifting, albeit still limited to outdoor settings, warmer weather and pent-up demand could bode well for the leisure sector as it opens up further.”

Consumers are also looking to get away, with spend on holidays up seven percentage points this quarter, to -31%.

Oaten continued: “Whilst international travel for leisure remains restricted for now, consumers are still keen for some time off. Many will have accumulated vouchers from cancelled trips in 2020 and will be looking to rebook whilst they remain valid. For others, ‘staycationing’ offers another chance this summer to explore new areas around the United Kingdom.”

Whilst consumers seek to socialise again, they remain more hesitant, at least in the short term, on attending large events and festivals. Just 7% said they’d go to a live event within a month of being permitted to, with 25% preferring to wait six months or more.

Oaten concluded: “Leisure consumers remain cautious on large events, and the reopening of these might not immediately see pre-pandemic crowd sizes. The continued vaccination programme could be key to boosting consumer confidence to return to large events.

“Likewise, just 15% of consumers said they’d return to gyms within a month of reopening.

“The prospect of sharing gym equipment or working out in an indoor setting may be behind the caution consumers are displaying with regard to returning to gyms. Equally, after a year of exploring at-home fitness options, it could be we’re also seeing the start of more permanent shifts in consumer behaviours.”

Deloitte chief economist comments on inflation figures from the ONS

Commenting on the latest inflation figures, published by the ONS today, Ian Stewart, chief economist at Deloitte, said:

“Inflation hit a low last year and, while still less than half its target rate, is likely to rise gradually over the next year as activity snaps back. Rising unemployment and slack in the economy will limit inflationary pressures and keep the Bank of England’s focus on activity.”

Ian Stewart is a Partner and Chief Economist at Deloitte where he advises Boards and companies on macroeconomics. Ian devised the Deloitte Survey of Chief Financial Officers and writes a popular weekly economics blog, the Monday Briefing. His previous roles include Chief Economist for Europe at Merrill Lynch, Head of Economics in the Conservative Research Department and Special Adviser to the Secretary of State for Work and Pensions. Ian was educated at the London School of Economics.

About Deloitte

In this press release references to “Deloitte” are references to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”) a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see deloitte.com/about for a detailed description of the legal structure of DTTL and its member firms.

Deloitte LLP is a subsidiary of Deloitte NSE LLP, which is a member firm of DTTL, and is among the UK’s leading professional services firms.

The information contained in this press release is correct at the time of going to press.

CFOs anticipate return to growth and lasting change in 2021

Finance leaders expect a return to growth in 2021 with optimism rising to a record high, according to Deloitte’s latest CFO survey. Despite the surge in business optimism, half of CFOs do not expect demand for their own businesses to recover to pre-pandemic levels until the last quarter of 2021 or later.

The Deloitte CFO survey for Q4 2020, which gauges sentiment amongst the UK’s largest businesses, took place between 2nd December and 14th December 2020, so before new COVID restrictions announced on 19th December and the Brexit deal on 24th December.

A total of 90 CFOs participated in the latest survey, including CFOs of 12 FTSE 100 and 44 FTSE 250 companies. The combined market value of the UK-listed companies that participated is £308 billion, approximately 13% of the UK quoted equity market.

Revenues, risk appetite and economic landscape

There has been a sharp improvement in CFO expectations for UK corporates’ revenues this quarter with 71% expecting a rise over the next 12 months, up from 29% in Q3 2020, while over half (53%) of CFOs expect operating costs to rise. For the first time since 2015, a net balance of CFOs are expecting corporate operating margins to increase in the next year.

Risk appetite remains weak with only 19% believing it is a good time to take greater risk onto the balance sheet, however this is up from just 3% in Q1 2020.

Consistent with the idea of a return to growth CFOs’ expectations for inflation have risen markedly since Q3 2020. Over half of CFOs (59%) expect consumer price inflation to be at or above 1.6% in two years’ time, up from 36% three months ago.

While still showing a net negative balance, CFOs’ expectations for hiring, capital spending and discretionary spending have increased from the record lows seen in Q1 2020, with a strong uptick in each category in the last quarter. Expectations for hiring and spending are running higher than the levels seen between 2016 and mid-2019.

COVID and beyond

More than three quarters (78%) of finance leaders expect COVID-19 restrictions on movement and activity to continue through the first half of 2021, while 57% expect these measures to be removed permanently in Q3 2021.

CFOs believe that the pandemic is set to trigger a fundamental change in the business environment. An overwhelming net balance (98%) of CFOs expect flexible and home working to increase – with a five-fold increase in home working expected by 2025.

Similarly, 98% of CFOs expect levels of corporate and individual taxation to rise, two thirds (62%) anticipate higher regulation of the corporate sector and 59% see the size and role of government in the economy increasing.

Ian Stewart, chief economist at Deloitte, commented: “Boosted by the prospect of mass vaccination and growth, business sentiment surged this quarter with CFOs taking the most positive view on profit margins for the last five years. This rebound in sentiment occurred despite a backdrop of continued Brexit negotiations and with two thirds of CFOs believing that a no-deal outcome would have a severe or significant negative effect on the economy. In the three and a half years between the EU referendum and the pandemic CFOs have ranked Brexit as the top business risk for all but two quarters. The announcement of a deal after the survey closed is likely to have offered an end-year boost to CFO sentiment. The survey shows that in the first half of December, CFOs expected restrictions on movement and activity needed to combat COVID-19 to continue for the first half of this year. The announcement of further restrictions after the survey will clearly add to such concerns.

“Business leaders believe the pandemic will permanently change the business landscape. CFOs anticipate a five-fold increase in homeworking relative to pre-pandemic levels by 2025 and believe that the state will be both larger and more active in the long term.”

The impact of Brexit

CFOs think a no-deal Brexit would have been a far greater risk to the economy and to business than the actual outcome of a trade deal. Moreover, they saw either Brexit outcome as having a greater negative impact on the economy than on their own businesses. The large companies on our panel are more confident about their own ability to deal with Brexit than the wider economy’s.

Two thirds (66%) of CFOs saw a no-deal outcome as having a severe or significant negative effect on the economy and 18% expected a similarly negative impact on their own business. Just 20% of CFOs saw a trade deal as a major negative for the economy and this dropped to 7% in relation to their own business.

A majority (61%) of CFOs expect the post-Brexit points-based immigration system to act as somewhat of a drag on long-term economic growth. Around a quarter (27%) expect little or no effect, while 6% expect the new immigration system to support growth.

A net balance of 66% of CFOs expect both goods and services trade with the EU to decrease, while 77% expect a decrease in high-skilled immigration from the EU, with only 24% expecting an increase in skilled immigration from outside the EU.

Strategy and spending

CFOs remain in defensive mode with 49% and 46% respectively rating increasing cash flow and reducing costs as strong priorities. Meanwhile expansionary strategies have risen in popularity slightly since Q3, for example, around a quarter (28%) cite introducing new products, services or expanding into new markets as a priority for the year ahead.

Richard Houston, senior partner and chief executive of Deloitte UK, said: “The pandemic has triggered fundamental and lasting changes in business, with CFOs expecting rising levels of home-working, greater diversification of supply chains and increasing investment in technology.

“CFOs are optimistic about operating in this changing world, with a return to growth expected this year. However, with pandemic restrictions expected to be in place through the first half of this year and elevated uncertainty CFOs are maintaining defensive balance sheet positioning.

“The UK-EU trade deal ends over four years of uncertainty for business and is a far better outcome than the alternative of no-deal. Nonetheless, CFOs also recognise the challenges that leaving the EU may pose in the years ahead. The UK deal has very limited provisions for services, particularly for professional and financial services. These high productivity sectors are major UK successes and make vital contributions to jobs and prosperity. UK businesses urgently need additional clarity on key issues including financial equivalence as well as more information on the specific changes to other cross-border trading services.”