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Drawing on insights from our of 2,000 consumers, our mid-year outlook for consumer spending examines the forecast for demand against the backdrop of an improving economy. Touching on retail, leisure and social spending, we explore the trends that will influence demand for the rest of the year.

Consumers feel brighter towards their finances

Households' real disposable incomes are growing, driven by a reduction in inflation, real wage increases and the implementation of tax cuts from April. This improvement in the general economic picture is seeing consumer confidence steadily recover, with GfK’s latest consumer confidence index measuring -14 for June, the highest reading since November 2021, before Russia’s invasion of Ukraine.

Our latest consumer survey mirrors this gradual improvement in sentiment. The number of consumers who said they feel financially comfortable has seen a slight uptick from 47% in Q2 a year ago to 49% in Q2 2024. Additionally, the percentage of consumers reporting that the increased cost of living has reduced their disposable income has decreased from 64% in the final quarter of 2023 to 57% in spring/summer 2024. We expect this downwards trend to continue as the year progresses.

Our research also reveals other encouraging signs, such as a decrease in the number of consumers anticipating financial hardship. For example, in Q2 2023, 27% of consumers thought their financial situation would worsen in the next three months, whereas in our most recent survey only 16% believe this to be the case. Notably, consumers earning £40k per year or less, who may have recently benefited from National Minimum Wage increases, showed a more significant improvement in optimism. 19% of these consumers expected their financial situation to deteriorate in the next three months, down from 32% a year ago. This is encouraging news and means financial stimulus directed at these consumers is starting to work.

Consumer sentiment towards the economic climate improves

Since our survey in Q4 of 2023, consumers have reported an improvement in their disposable income. On average, consumers now have 18% of their household income remaining after covering essentials like mortgages/rent, household bills, energy and food, compared to 17% at the end of 2023. Among consumers earning £40k or less, who may have recently benefited from National Minimum Wage increases, there is an even more notable increase, with disposable income rising by 1.6% since the end of 2023, reaching 14% on average. Despite inflation easing and returning to more normal levels, respondents to our survey still consider higher prices to be the primary factor affecting non-essential spending over the next 12 months, with 91% expressing this concern – a mere 1% improvement since Q4 of 2023. However, there has been a notable recovery in sentiment regarding other economic factors.

Sentiment towards high interest rates hampering discretionary spending has improved by 4% since the end of 2023, and the housing market has seen a 5% improvement. But improvement in sentiment across these two economic factors is not equal across all age groups. Gen Z in particular are concerned about the economic impact of high interest rates and the housing market on spending. 84% of this group say high interest rates will impact spending in the next 12 months compared to 75% of all respondents, and a whopping 82% of Gen Z say the housing market will impact spending in the next 12 months compared to 55% of all consumers. This significant shift in sentiment could have a major impact on the future spending intentions of this group.

Despite this fragile sentiment data from Gen Z consumers, the outlook for interest rates and the housing market is positive. With the first interest rate cut now expected in late summer, we anticipate further improvements in these two areas by the end of the year. This is promising news for the housing market and, consequently, for household goods spending and big-ticket items which typically see an uplift when the housing market is strong.

Another indicator of improving consumer sentiment around personal finances is the notable decrease in the number of consumers planning to cut back on essential spending since the end of 2022, when inflation was at its peak. This includes areas such as energy consumption, car usage, and groceries. Sentiment towards grocery spending has seen significant improvement, with a 4% decrease in those planning to cut back on this category since Q4 of 2023, and an 8% recovery since the height of cost-of-living pressures at the end of 2022.

Changes in leisure and social spending

The cost-of-living crisis led to widespread cutbacks, affecting the entire consumer markets industry as consumers reduced spending. Looking back 18 months to October 2022, when inflation peaked at 11.1%, our survey reveals an improvement in sentiment across all spending categories. Notably, the percentage of consumers who say they won't cut back on anything rose to 21% in May 2024, up from 14% during the height of the crisis in 2022. However, recovery across core spending categories has been uneven, with some rebounding more robustly than others.

Our survey indicates that leisure spending on dining out, drinking, and takeaways was the most severely impacted at the height of the cost-of-living crisis. However, these areas have since experienced the most significant recovery in sentiment, with dining out improving by 10% and takeaways by 8% when comparing Q2 2024 results with our survey at the end of 2022. This recovery is promising for the leisure and hospitality sector, which has faced considerable challenges since the pandemic and succeeding inflationary crisis. Unlike retailers, leisure and hospitality businesses struggled to pass on inflationary costs, due to fear of further alienating consumers. 

The same, however cannot be said for short- and long-stay holidays. Although these categories have been among the last areas of spend consumers are willing to cut back on, sentiment toward holidays and short breaks has stagnated following the post-Covid boom. The ‘revenge travel’ trend appears to be over, and the recovery in this sector has not been linear. Year on year, there has been a slight uplift in the number of consumers who plan to cut back spending on short breaks (up 1% since our spring/summer 2023 survey) and longer holidays (up 2% for the same period). Given the spring and summer seasons are typically peak periods for travel, and a time when consumers finalize payments for package holidays and accommodations and set aside money for spending, this is particularly concerning.

Holiday habits and spending

Our research also suggests new emerging behaviours when it comes to travel this year, with overseas travel losing its appeal for some, and intentions to take vacations in the UK remaining more stable. There is also a notable increase in the number of consumers who do not plan to take any holidays or breaks, rising from 32% a year ago to 35% in 2024. Gen X and Baby Boomers both saw a marginal uplift in those consumers who said they would not go on holiday this year, but Gen Z saw a more notable rise from 18% in Q2 2023, to 25% in spring/summer 2024. This shift in Gen Z’s intention to travel is likely due to this group being one of the most concerned about factors at play in the future economic climate, and the impact they will have on spending.

Regarding overseas vacations, consumer intentions show a decline, which is notable across some of the age groups. The percentage of consumers planning trips lasting five days or more has decreased from 27% a year ago to 25% in 2024. However, there are slight increases among Gen X and Millennials, 20% of Gen X (up 2% year on year) and 29% of Millennials (up 1% year on year) plan to travel abroad in the next three months. Baby Boomers show a slight decrease in intentions, from 25% in 2023 to 23% this year. Gen Z, however, exhibits a significant drop, with intentions to take overseas holidays of 5 days or more falling from 40% in 2023 to 26% this year –a substantial 14% decline.

Short overseas breaks also see a significant drop, with the overall percentage of consumers planning such trips in the next three months falling from 20% in 2023 to 15% in 2024. While Gen X remains stable, Millennials see a decrease from 26% in 2023 to 21% in 2024. Baby Boomers' intentions drop from 14% to 8%. Gen Z again shows the most significant decline, with intentions falling from 33% in 2023 to 22% in 2024, an 11% decrease.

However, our research suggests the domestic market will be less affected by declining intentions across consumer groups. Holidays lasting five days or more will see a slight decrease, with 21% of consumers planning such breaks in the next three months in 2023, compared to 19% this year. Year-on-year variations in travel intentions across age groups are minimal, indicating a more stable market for these trips. Similarly, short breaks in the UK are expected to maintain stable demand, with 20% of consumers planning these trips in both our Q2 2023 survey and Q2 2024 survey.

Our research indicates a notable shift in travel behaviours, with a decline in overseas travel intentions and a more stable outlook for domestic vacations. The increase in consumers opting out of holidays altogether, especially among Gen Z, reflects growing economic concerns and cautious spending attitudes among this group in 2024.

Shifting summer holiday booking patterns

With higher prices still a key concern for most consumers, our survey indicates changing holiday booking patterns and a move away from January as a key booking window for summer breaks. 30% of respondents to our survey secured overseas summer holidays (of five days or more) by December 2023 or before, reflecting early planning to manage costs, whilst 18% still intend to book, indicating some caution. Similarly, 30% booked UK summer holidays early, with 19% yet to book as of May 2024.

For shorter UK breaks, only 16% of consumers booked early (December 2023 or before), whilst 34% have still yet to book, showing more spontaneity due to the flexibility of UK travel. However, overseas short breaks are where we see some notable changes in behaviour. 31% of consumers booked these trips early, and 21% still plan to book, reflecting financial caution. The decline in short overseas trips planned for the next three months, from 20% in 2023 to 15% in 2024, suggests suppressed demand due to rising airline ticket prices and a hangover from overall inflation. This will see the late-booking market for short breaks overseas reduced for some time yet in favour of increased planning to manage costs.

Changes to consumer products and retail spending

Our survey reveals a general trend of recovery in consumer products and retail spending since winter 2022. The most substantial improvements are seen in clothing and accessories, with the percentage of consumers planning to cut back decreasing from 32% in winter 2022, to 23% in our spring/summer survey this year. This category also shows a 4% improvement in sentiment over the past six months, since our winter 2023 survey. This positive trend should provide clothing and accessories retailers with some confidence as they move into summer trading, following a mixed start to 2024.

Health and beauty products have also experienced a positive recovery in sentiment, following a setback at the end of 2023 when intentions to cut back increased to 18% from 15% earlier in the year. The improvement is driven by a notable uplift in sentiment among women, with only 20% planning to cut back on health and beauty spending in the next three months, compared to 25% in our winter 2023 survey.

In other categories, such as home and garden improvements, technology, and big-ticket purchases, we’ve observed a moderate recovery in consumer sentiment since the height of the cost-of-living crisis. However, over the past 12 months, sentiment towards cutting back on big-ticket purchases and technology has seen a slight increase, indicating more cautious consumer behaviour in these areas. This is particularly true for Millennials, 11% of which plan to cut back on big ticket purchases in the next three months compared to 4% saying the same a year ago. Although less pronounced, this trend is similar in technology spending, with 15% of Millennials saying they will cut back on technology in the next three months compared to 12% a year ago. With many of these consumers earlier in the cycle of mortgage debt repayments than their older counterparts, and many whom may have young children living at home, it’s unsurprising these consumers are cutting back on non-essentials more than others.

The overall trend for cutting back on big ticket items and technology is supported by the most recent GfK consumer confidence index. This saw the major purchases index reach -23 in June which is well down on the pre-pandemic average of about +2. Caution around spending on major purchases is likely due to these items involving some form of credit, and with rate cuts not expected until late summer, many consumers will remain focused on deleveraging.

Cautious optimism for future spending intentions

Our mid-year outlook for consumer spending shows a positive trend in financial sentiment, driven by rising disposable incomes and a recovering economy. Consumers are gradually feeling more financially comfortable, with significant improvements noted among those earning £40k or less. Despite persistent concerns about high prices and interest rates, there is a cautious optimism about the future. Essential spending areas, such as groceries and energy, show reduced intentions to cut back, indicating a recovery from the height of the cost-of-living crisis. As the economy continues to stabilise, with anticipated interest rate cuts on the horizon, the overall outlook for consumer spending remains hopeful, paving the way for continued recovery in the latter half of the year.

To discuss our research, or any other business issue you may be facing, contact our experts.