Page last updated at 00:00 GMT, Thursday, 5 November 2009

Signs of growing confidence

By Anthony Reuben
Business reporter, BBC News

There was an audible gasp around the BBC business unit, and probably many other offices, when it was announced that the UK economy had shrunk in the three months from July to September.

Graph showing use of BAA airports

There had been signs from influential surveys that consumers were starting to feel more confident and that activity in the service sector was starting to pick up (as figures out on Wednesday seemed to confirm: the UK's service sector enjoyed its best month in a year.)

In our own unusual indicators series for the previous three months, the growth in sales of baked beans had been starting to slow and sales of emulsion paint were recovering, which were taken as signs of recovery.

In the third quarter of the year there were some positive signs and some negative signs.

BAA operates Heathrow, Gatwick, Stansted, Glasgow, Edinburgh, Aberdeen and Southampton airports in the UK, so its figures on the amount of passengers and cargo it handles are a good indicator of the state of air transport as well as broader commerce.

In the third quarter of the year its passenger numbers were down 2.7% from the same period of 2008 while the amount of cargo was down 8.5%.

While both figures are still falling, their decline is clearly slowing as the graph above shows.

Paint sales

Sales of emulsion paint showed an impressive recovery between April and June, growing 16.2% compared with the same period the previous year, having declined in each of the previous four quarters.

This series looks at the recession through indicators that are not usually considered.

For more details and discussion of the indicators used, see:

Paint sales are a good indicator of the state of the DIY market because almost all projects need some paint, and also of the housing market because people tend to paint their houses just before selling them and just after buying them.

Between July and September, paint sales grew 4% from the same period of 2008, according to the market researchers GfK, which was a slowdown, but still positive.

Analysts attributed the strength of the second quarter to the Easter weekend falling in the second quarter this year when it had been in the first quarter last year.

They also pointed out that the weather over the Easter bank holiday weekend was much more pleasant in 2009 than it had been in 2008.

Bean sales

On the groceries front, baked bean sales grew 14.6% in the third quarter of the year from the same period last year according to the market researchers Nielsen, which was only a small change from the 15% seen in the previous quarter.

A spoonful of baked beans
Baked bean sales - July to September - up 14.6% compared with Q3 2008

Source: Nielsen Scantrack

In the last update, it was pointed out that this showed a marked slowdown in growth in baked bean sales, which had grown by about 20% every month from November 2008 to May 2009.

Throughout this series, we have considered baked bean sales by value, because we were interested in the amount of money people were spending on groceries rather than the quantities they were buying.

Baked beans are considered, in economic terms, to be an inferior good which means that when people have more money to spend they will tend to spend less on beans - so slowing growth in bean demand was taken as a sign of an upturn.

But this interpretation has been challenged by Ed Buckley at the consultancy TNS Global, who contacted the BBC to say that the growth in sales value had been brought about by rising prices.

His research looked at 150 different baked bean products and found that prices had risen nearly 18% and that the reason sales growth was now slowing was that "consumers are trying to shield themselves from the full price increases".

Looking at the volume sales figures from Nielsen, the increases earlier in the year do indeed look less impressive and in the third quarter of the year unit sales fell by 1.9% compared with the same period the previous year.

It is entirely possible that this fall could be down to a combination of recessionary factors and price effects.

But Mr Buckley predicts that grocery prices will stabilise or even fall in the fourth quarter of 2009 and into 2010, which will mean that bean sales by value could even fall.

Bottled water

Another suggestion for an indicator of the recovery comes from the researchers Mintel, who say that returning consumer confidence has boosted sales of bottled water.

Woman drinking water
Some researchers have suggested sales of bottled water are a sign of the recovery

"When the decline in confidence began in the latter half of 2007, bottled water became one of the easiest products for cautious consumers to sacrifice," says Jonny Forsyth, senior drinks analyst at Mintel.

"However, with consumer confidence rising over recent months, consumers have started to loosen their purse strings and bottled water has been one of the beneficiaries."

So even though the economy continued to contract in the third quarter, there are signs of returning confidence in some parts of it, be it from people using airports, buying fewer beans or drinking bottled water.

But it is worth bearing in mind that all these unusual indicators are based on people buying things, which is a sign of consumer confidence. It is entirely possible that people are wrong to be confident, just as most analysts were wrong to expect the economy to grow in the third quarter.

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