The Nationwide Building Society Consumer Confidence Index for January 2012 has revealed consumer confidence has risen to its highest level for five months.

Nationwide’s Chief Economist, Robert Gardner said:

“After ending 2011 close to all time lows, consumer confidence staged a modest recovery at the start of 2012, picking up by nine points to 47.  Nevertheless, sentiment remains subdued by historic standards, with the main index almost 30 points below its long-run average.”

“Given the challenging economic backdrop, with the UK economy contracting in the final quarter of 2012 and the unemployment rate rising to its highest level since 1995 in recent months, the improvement may prove to be little more than a temporary bounce.”

“However, a number of other economic indicators have also surprised and been more positive than expected in recent weeks, which may be an indication that underlying economic conditions are not as weak as feared.  Surveys of business activity in the manufacturing and service sectors picked up unexpectedly at the start of the year.”

“The sharp fall in inflation, from 5.2% in September to 3.6% in January may also be lifting consumers’ spirits, easing the squeeze on strained household budgets.”

“Looking forward, renewed hope that the UK will avoid a double-dip recession may support sentiment, especially since the downward trend in inflation is set to continue through 2012.  But with the UK recovery likely to remain weak in the first half of the year, a significant and sustained rise in consumer confidence remains unlikely in the near term.”

“There was a noticeable improvement in expectations in January with confidence towards future economic conditions helping to drive this measure up during the month.  Historically, the Expectations Index has been the most volatile of the three core indices – indeed, a sharp deterioration in this component during the second half of 2011 helped push the main confidence index to its lowest level on record.”

“Given the uncertain economic outlook, this measure is likely to remain fairly volatile.  No doubt developments in the Eurozone will continue to play an important role in shaping how people view the UK’s future economic prospects, given the strong economic and financial linkages with the single currency area and the UK’s reliance on exports to drive its recovery at present.”

“Consumers expressed a greater propensity to spend on household goods in January with 40% of people believing it to be a good time to buy.  This is up from 31% in December and has now reached its highest point since the introduction of the 20% VAT rate twelve months ago.”

“Falling inflation and price cuts announced by the UK’s big energy suppliers may have left consumers feeling hopeful that the squeeze on household budgets will ease, boosting their spending power.”

“Given the uncertain economic outlook there was no surprise that consumers remained cautious about making major purchases, with twice as many people judging it to be a bad time rather than a good time to make a major purchase.”