Commentary: If the UK economy is growing, why don't people feel better off?

“In the first half of this year, consumer sentiment and economic growth came apart.

“Real GDP per capita, which measures economic output adjusted for inflation and population growth, grew at 0.6% from January-March, and 0.4% from April-June. This isn't spectacular, but it's better than the average for the last two years (roughly 0.23% per quarter), and a big improvement over the last quarter of 2025 (essentially zero). Consumer attitudes went the other way – the GfK consumer confidence index fell sharply in the first months of the year, before rising again after April.

“I think there are a number of things going on. First, sentiment measures like the GfK index are partly forward looking: they tell us where people feel the economy is going in the future, not just where it is today. That means, for example, that a 'Burnham bounce' affected July's sentiment even before the new prime minister entered Downing Street, well before any policies have a chance to impact GDP.

“The prices of certain goods play a more important role in people's perceptions of the economy than their share of GDP and inflation measures would suggest. This is particularly true of frequently bought goods like food and fuel. My Surrey colleague Ricardo Nunes has shown that house prices are also crucial.

“So when fuel and electricity prices surged earlier in the year after the outbreak of war in Iran, that plausibly caused sentiment to fall, even though inflation-adjusted output was growing: the inflation adjustment is less influenced by fuel than people's own feelings and perceptions are.

“Importantly, this doesn't imply we should ignore people's perceptions. Even aside from discussions around the social contract and political stability, household sentiment influences all kinds of decisions: how much to spend and on what, which jobs to apply for, whether to start businesses, and all of these will affect the economy going forward.”