Consumer confidence is at a record low – here’s why that matters

Another day, another major warning sign for the UK economy. Consumer confidence had dropped to its lowest level on record, and the records go back almost half a century.

A closely watched index of how people are feeling about the prospects for their finances and the wider economy has dropped to -40 in May, from an already abysmal -38 last month.

That's one point lower than the previous low reached during the financial crisis in July 2008.

It matters because household consumption – what we spend on everything from groceries and energy to home improvements and washing machines – makes up almost 60 per cent of all spending in the economy.

If people fear that their financial situation is getting worse and hold back on that spending, then there is a considerable risk that the country will tip into a recession.

Lower spending means lower profits for businesses which in turn means less investment. UK firms already invest less than their counterparts in other wealthy countries and there has been a serious investment slowdown in recent years, partly due to uncertainty surrounding Brexit.

Even a big tax break designed to spur investment, the so-called super-deduction, hasn't tempted companies to splash out.

It's possible, of course, that confidence will bounce back but you would be brave to count on that. Retail sales have slowed down and GfK, the organisation that compiles the consumer confidence data, found that people are increasingly saying they will hold off making major purchases this year.

GfK summed things up: “The outlook for consumer confidence is gloomy, and nothing on the economic horizon shows a reason for optimism any time soon.”

Breaking the cycle of uncertainty, low confidence and low investment is vital to securing the UK's long-term prosperity.

If the government needed another reason to act to cushion the impact of soaring energy bills and food prices, it now has one.

There are dangers to injecting money into an economy that is already seeing massive increases in prices. If it is poorly targeted, it risks pushing inflation higher still, making a bad situation worse.

Yet the chancellor has vowed that he will cut taxes to tackle the cost of living crisis and he will wait until the autumn Budget to do it.

This is foolish on two fronts. First, it is impossible to focus tax cuts on those who most need help with rising bills. Much of the benefit will inevitably go to people or businesses that don't really need it.

Second, action is needed now, not in several months, to give struggling households the confidence they need that the government will help them through hard times.

The solution is clear: make sure that public money urgently goes to those most in need.

As the boss of the Confederation of British Industry, Tony Danker, said this week: “Helping people with heating and eating bills will not fuel inflation.

“You need to stimulate business investment now – that’s not going to overheat the economy.

“It’s going to make sure that any downturn in our fortunes is short and shallow because growth is coming soon.”