Nationwide has launched its latest consumer confidence index, which shows confidence increasing again after sharp falls in the past few months. Fears about the economy in recent months have not been realised and pessimism has evaporated, it said on Wednesday.

The Index, in partnership with TNS measures the population's view of the current position of, and future prospects for, the UK. It takes into account the general economic situation, employment conditions and personal expectations.

	Feb	March	April	May	June	July
Consumer Confidence Index	110	108	109	102	95	101
Present Situation Index	106	103	103	106	100	104
Expectations Index	112	111	113	109	91	99
Spending Index	116	106	112	106	108	113

Stuart Bernau, Nationwide executive director, said: "The Index shows that consumer confidence rebounded in July following steep falls in May and June. It appears that fears about a downturn that existed in recent months have lessened. The prospect of an interest rate cut may also have aided the rebound in sentiment."

"The recovery in sentiment occurred despite the terrorist activities seen in July, which had the potential to dampen confidence."

Confidence Rebounds in July

In July, four of the five components that make up the Index rose. Of these, the Current Employment Situation and Employment Outlook saw the biggest rises – the balance of people feeling positive about each measure rose by 8% and 7% respectively. The one measure to fall, Household Income Outlook, only fell by 1%. Overall, the index shows that consumer confidence improved in July following successive falls in May and June. The Index now stands at 101 (May 2004=100), up from 95 the previous month.

The rebound in July can largely be attributed to recent fears about the economy not having been realised and the labour market remaining strong. In addition, there has been some recent positive data such as stronger than expected retail sales and some pick-up in housing market activity. However, there is continuing economic uncertainty - reflected in the close MPC vote last month – which indicates that consumer confidence may continue to change.

Looking back over the first 4 months of the year, the index plateaued at a 12-month high ranging between 108 and 110. It then fell in May and June before July’s rebound. The fall in confidence in May and June was driven by consumers adopting a more pessimistic outlook – highlighted by the Expectations Index – whilst confidence in the Present Situation was more stable. At that time, there were concerns over a possible house price crash, retail sales were downbeat and interest rate speculation concerned a possible rise. Consequently, consumers were wary about the outlook for the economy, employment and income. However, as fears have lessened, some of this fall has been reversed in July.

House price inflation affects consumer spending, as noted by the MPC in July. This is because when house price inflation slows, consumers tend to feel more cautious in their spending decisions. The reduction in annual house price growth from more than 20% a year ago to 2.6% now, makes consumers’ expectations particularly relevant.

In July, consumers forecast house price growth of 2.0% in the next six months. This is slightly up from 1.5% the previous month and suggests consumers generally believe that house prices have broadly stabilised and have entered a period of slow growth.

It appears that the fears of a crash expressed by some a few months ago have not been realised and consumers now believe that the housing market is gently cooling.

The new index will now be published on the Wednesday before each monthly MPC meeting.