Consumer confidence hit by ‘ripple of fear’ over Iran war

Neil Bellamy, a spokesperson for GfK, articulated the pervasive sentiment, stating, "A ripple of fear is spreading across the nation. People simply do not feel the economy is robust enough to ride out the knock-on effects from the Middle East conflict." This statement encapsulates the fragility of consumer sentiment, which, having shown tentative signs of recovery from the cost-of-living crisis, now faces a fresh and potent external shock. The conflict, described in the report as the US-Israel war with Iran, has injected a profound layer of uncertainty into global markets, with immediate repercussions for commodity prices and supply chains, which inevitably trickle down to the pockets of ordinary consumers.

This downturn in confidence emerges against a backdrop of already challenging economic indicators. Figures released by the Office for National Statistics (ONS) revealed a 0.4% fall in retail sales for February, a period preceding the full onset and escalation of the Iran conflict. This pre-existing weakness in retail activity suggests that consumers were already treading carefully, making the subsequent drop in confidence even more alarming. The ONS data detailed a decline in supermarket sales, indicating that even essential spending was under pressure, possibly due to persistent inflationary pressures or a general belt-tightening among households. Furthermore, retailers of household goods experienced dampened demand, which the ONS attributed in part to the unusually wet weather experienced in February. However, underlying economic anxieties likely played a more significant role, as consumers tend to defer large, non-essential purchases during periods of uncertainty.

Non-store retailers, encompassing the vast landscape of online and catalogue businesses, also reported a dip in sales volumes. Retailers suggested that many shoppers had brought forward their spending to capitalize on the ubiquitous January sales, leaving February with less impetus for consumer activity. While the ONS noted that the drop in retail sales was "modest" and actually below the more pessimistic forecasts from some economists, the concurrent fall in consumer sentiment acts as a crucial forward-looking indicator. Ashley Webb, a UK economist at Capital Economics, underscored this point, warning that the decline in confidence is "a sign of things to come," implying that the full economic ramifications of the geopolitical tensions are yet to be felt.

Indeed, the most immediate and visible economic impact of the escalating US-Israel war with Iran, which intensified around 28 February, has been a dramatic surge in energy prices. Benchmark Brent crude oil, a global bellwether for energy costs, has soared by approximately 50%, breaching the $110 a barrel mark. This sharp increase in crude oil prices has swiftly translated into higher costs at the fuel pumps, directly impacting millions of motorists across the UK. Data from the RAC, a prominent motoring organization, illustrates this stark reality, showing that petrol prices have climbed by an average of 34%, while diesel has seen a significant 24% increase. These rising fuel costs erode disposable income, leaving households with less money for other goods and services, and contribute to inflationary pressures across the economy as transportation costs for businesses increase.

Beyond the immediate sting at the petrol station, there are mounting fears about the trajectory of household energy bills. While the energy price cap is set to fall in April, offering some temporary relief, the long-term outlook appears bleak. Energy consultants Cornwall Insight, known for their accurate predictions, have projected that average annual energy bills for a typical household could rise by around £300 from July. This anticipated increase stems from the sustained high wholesale gas prices, which eventually filter through to consumer tariffs, even with regulatory caps in place. Such a substantial hike in energy costs would place renewed strain on household budgets, particularly for lower-income families, and dampen overall consumer spending power.

GfK’s Consumer Confidence Index, which amalgamates various consumer sentiment metrics, registered a two-point decline this month, settling at minus 21. More concerningly, expectations for the general economic situation over the next year plummeted by a more substantial six points, reaching minus 37. This particular metric is highly indicative of future spending patterns, as consumers who are pessimistic about the broader economy are less likely to engage in discretionary spending. Ashley Webb of Capital Economics reiterated the gravity of these figures, stating, "The decline in GfK consumer confidence in March… is probably the start of a bigger fall and suggests real household spending growth will soften in 2026." This forecast paints a picture of sustained economic headwinds, potentially leading to a period of subdued growth and heightened financial caution.

The "shaky base" on which the economy currently stands, as described by Susannah Streeter, chief investment strategist at investment platform Wealth Club, is being further undermined by these developments. GfK’s research specifically highlighted that individuals are now less inclined to make significant purchases, such as new furniture or electrical goods, and are instead showing a greater propensity to put money into savings. This shift towards precautionary saving is a classic response to economic uncertainty, as households seek to build a buffer against potential future hardships like job losses or further cost-of-living increases. The February ONS retail sales drop, although smaller than anticipated, becomes more ominous when viewed through the lens of weakening consumer confidence.

Streeter further elaborated on the challenging environment facing the retail sector: "With confidence weakening, costs rising due to higher freight and energy costs and spending intentions faltering, the outlook for retailers looks set to be an increasing struggle in the months to come." This comprehensive assessment points to a perfect storm brewing for businesses, particularly those reliant on consumer spending. Higher energy costs directly impact retailers’ operational expenses, from heating stores to powering logistics networks. Increased freight costs, driven by rising fuel prices and potential supply chain disruptions linked to geopolitical instability, mean that goods cost more to bring to market. These elevated input costs, coupled with a consumer base that is increasingly reluctant to spend, will inevitably squeeze profit margins and could lead to difficult decisions regarding staffing, investment, and pricing strategies.

The broader economic implications extend beyond retail. Businesses across various sectors face the prospect of reduced demand and escalating operational costs. Manufacturers, for example, will contend with higher energy bills for production and increased transportation costs for raw materials and finished goods. The construction sector might see a slowdown in projects as both commercial and residential investment become more cautious. Moreover, the inflationary pressure exerted by rising energy prices could force central banks to maintain higher interest rates for longer, or even consider further hikes, in an effort to curb inflation. Such a move, while necessary to stabilize prices, would simultaneously dampen economic activity by increasing borrowing costs for both businesses and consumers, creating a difficult balancing act for policymakers.

The government, already grappling with post-pandemic recovery and existing inflationary pressures, will face renewed challenges in navigating this landscape. Potential interventions might include further energy support schemes or fiscal measures aimed at stimulating consumer demand, though these would need to be carefully balanced against national debt levels and the broader economic outlook. The UK’s situation is also not isolated; the global nature of energy markets and interconnected supply chains means that the "ripple of fear" over the Iran conflict is likely to resonate internationally, contributing to a more uncertain global economic environment.

In essence, the confluence of escalating geopolitical tensions, surging energy prices, and a palpable decline in consumer confidence is creating a formidable challenge for the UK economy. The shift towards greater saving and reduced discretionary spending reflects a fundamental change in consumer behaviour, driven by a deep-seated apprehension about the future. For businesses, this translates into a period of increased costs and dampened demand, threatening profitability and growth. As the conflict in the Middle East continues to unfold, its economic repercussions are poised to shape the immediate and medium-term outlook, making the consumer’s mood a critical barometer for the nation’s financial health.