Consumer confidence increased more than expected in January, defying the recent weakness in the economy. The GfK headline index rose by 4 points to -29 (consensus/BarCap: -32), reaching a six-month high (see chart).

All five component indices increased in January, although the most striking rise was in the sub-index for the economic situation over the next 12 months, which increased by eight points to -33. The sub-index for the economic situation over the past 12 months increased by 4 points to -58 while the climate for major purchases also appeared to have improved significantly, increasing by nine points to -22. The backward and forward looking measures of the personal financial situation increased by one point each.
 
The increase in consumers' view about the general economic situation appears at odds with the data so far which indicate that economic activity remains subdued. However, it is worth noting that the survey was carried out before the Q4 GDP data were released, which showed output contracted at the end of last year. Since then, the probability of a technical recession in the UK has increased.

We think that risks of a double-dip recession, and our expectation that the deterioration in the labour market has not bottomed yet, make it unlikely that consumer confidence will continue improving significantly from here. Furthermore, the GfK NOP warned that the index can be subject to non-economic influences and that this month's increase could reflect a Christmas 'feel good' factor and seasonal sales. Such blips tend to be short-lived. For instance, the jump in the headline index following the royal wedding was unwound completely within a few months. As such we would expect consumer confidence to remain at low levels in the coming months.

source: BarCap