Our Household Finance Review, published today, delves into the key trends and indicators that shaped consumer behaviour during this period.

Q3 witnessed a gradual rebound in consumer confidence from the historic lows experienced in the aftermath of the Truss administration’s mini-budget. Despite this upward trajectory, however, confidence remained established in a significant negative net position. More recently the confidence indicator has been volatile in Q4, with some improvement in November helped by more encouraging news on the inflation outlook. However it remains in firmly negative territory with factors ranging from energy cost uncertainty to global events such as the situation in the Middle East, underscoring the fragility of confidence in the current economic and geopolitical environment.

Chart 1: Consumer confidence

Consumer spending in Q3 presents a contradictory scenario, where retail sales values ascended while underlying sales volumes experienced a decline. This divergence, evident across various retail categories, reflects the delicate balance between fragile consumer confidence and escalating cost pressures. The recent patterns and figures in retail activity show signs of weakness, suggesting the possibility that more households have run through those savings built up through the pandemic and now cannot afford to maintain expenditure at current levels. Despite these signs of weakness it is not all doom and gloom, with specific sectors such as the travel industry seeing continued sales strength throughout the year.

Chart 2: Card spending – number of transactions (000s)

On the mortgage front, lending for house purchases continued to decline sharply, impacting both first-time buyers and home movers. Affordability challenges, stemming from the still-significant gap between house prices and wages, as well as higher interest rates and cost of living, pose significant hurdles for prospective homebuyers, creating a barrier for many seeking to enter of move in the housing market.

A trend to monitor going forward is the continued erosion of household deposits held with retail banks. Deposit levels at the end of the quarter were three percent lower than the previous year, accelerating from the contraction observed in the preceding quarter. Despite the decline overall deposit levels remain significantly elevated, reflecting the cushion built up during pandemic-related social restrictions. Likely related to the running-down of these excess savings, the levels of overdraft debt over the quarter continued to decline, even as cost pressures persisted. However, if overdraft debt begins to tick up over the coming months, this would indicate an deepening of financial stress levels.

It's also crucial to note that savings are not evenly distributed across households. Although inflation is on the decline and wage growth is currently strong, the impact of cost-of-living and interest rate pressures is particularly acute for lower-income households, which are less likely to have accumulated additional savings.

Amidst the ongoing cost-of-living and interest rate pressures we have, unfortunately, seen arrears cases rise through 2023 and this continued in the third quarter. Although the increases are of concern, numbers of customers in arrears remain low compared with historic records, with customers in arrears accounting for less than one per cent of all mortgages. Whilst we do expect to see arrears continue to increase for a period the more stringent underwriting criteria in place over the past decade, combined with extensive, tailored forbearance by lenders, will see numbers peak well below that seen in previous arrears cycles, including during the Global Financial Crisis.

In conclusion, the Q3 household finance landscape is marked by a delicate interplay of recovery and challenges. As we move into Q4 the trajectory of consumer confidence, spending patterns and borrowing trends is far from certain. The resilience of households in the face of economic uncertainties is evident, yet vulnerabilities persist. Stay tuned for our next analysis as we unravel the ongoing story of household finances in these turbulent times.