Bill Jamieson: How low must we go before Mr Feel-Good returns?

FEW developments sum up the end of an era more than the slump in the 'feelgood factor' to its lowest level ever. Whether measured by consumer confidence, house prices, mortgage applications or general optimism about the economy, the feel-good factor has tumbled sharply, and an early return cannot be counted on.

This will be troubling news for Gordon Brown and his political strategists who may have been counting on a short, sharp downturn and a return of confidence in time for a double election – for the Westminster Parliament and Europe – in June of next year. He will be pushed back to 2010. But it also poses big questions for David Cameron's Conservatives, whose commitment to maintain public spending and forego tax cuts leaves the party with little by way of a fresh programme to encourage the feel-good factor to return.

Back in the mid-Nineties the Conservatives, trailing badly in the polls, searched in vain for the return of a character known as Mr Feel-Good, aka Essex Man, also answering to the description of Mondeo Man. Opinion polls were commissioned and search parties sent out. But no matter the frequency of these searches and their intensity, Mr Feel-Good, or Mr Feel-Good and his partner, had vanished.

The Conservatives, of course, never recovered from the blow to economic competence delivered by the collapse of their central economic policy – membership of the Exchange Rate Mechanism – and went down to a crushing defeat in 1997. The Feel-Goods had had enough. For the Labour Government it now looks ominously as if the spreading repercussions of the credit crunch into the real economy will have a similar effect on its standing for voters.

The erosion of real, after-inflation disposable income is one of them. Higher taxes on family cars, masquerading as a green tax on 'gas guzzlers', is another. They will question the Government's stewardship of financial regulation and in particular the well documented failings of the Financial Services Authority, the body to which Gordon Brown as chancellor transferred regulatory responsibility for the banking system. Most of all, voters will compare the speed and extent of policy response in the United States and demand to know why the Government here has not been able to deliver a fiscal stimulus package to help cushion the downturn in the broader economy.

The immediate omens are not good. Figures from the Nationwide last week showed house prices falling 0.6% month on month, the fifth consecutive monthly decline. The year-on-year rate, down to an increase of just 1.1%, is the lowest since 1996, while the monthly string of declines is the longest since 1992 – the year the Feel-Goods disappeared from view. What will almost certainly deepen and prolong the house price fall is the slump in mortgage lending.

Consumer confidence is also heading down. The latest Gfk survey reports that the consumer confidence index is now the lowest since 1993. All the main components of consumer confidence are weak. The balance of people believing the economic situation has worsened over the past year is the greatest for more than 13 years. "So far, the ONS retail sales data have been surprisingly resilient," says Citigroup UK economist Michael Saunders, "but with falling house prices, sluggish real incomes, plunging confidence and general weakness in surveys of retailers, we expect the ONS retail sales data to weaken markedly in coming months."

Saunders is not alone in this grim prognosis. Last week Lehman Brothers' economists described prospects for the UK economy as particularly bleak for the next two years – and perhaps beyond, warning that recession here is now a 35% probability as the credit crunch engulfs the housing market and broader economy.

Arguably what is most worrying about this analysis is its eerie similarity to the position in the US nine months ago. Michael Hume, Lehman Brothers' chief European economist, has cut his growth forecast for 2009 from 2% to 1.1%. He expects house prices to post a cumulative decline of about 8% by the end of 2009.

However, a less grim analysis needs to be stated. The fall in the pound should give a boost to the manufacturing sector, particularly export-orientated companies, though the strength of this critically depends on the economies of the US and continental Europe avoiding full-blown recession.

Second, the scale and depth of the domestic downturn should prompt the MPC to cut interest rates more rapidly than the comatose pace of recent months. Many now expect a quarter percentage point cut in rates to 5% next month, with further cuts taking the rate down to 4% or lower by this time next year.

Third, the slump in consumer confidence owes something to the bleak news headlines of the past weeks over developments in the financial and banking sectors. Business and household confidence surveys tend to improve when such headlines retreat back to the business sections.

Finally, we should not forget that we went into this downturn with a broad consensus that personal indebtedness was too high, household savings too low and house prices were rising at an unsustainable pace. So a downturn (of sorts) is not part of the problem, but part of the solution.

However, the Feel-Goods have gone and are unlikely to be back for some time. While that may have enhanced the Conservatives' poll ratings, a persistent lack of confidence will put the spotlight on the Opposition's lack of radical policy responses to get the economy out of the trough. Tory leader David Cameron is now stressing the need for better skills training and improved infrastructure. While these should certainly be championed, an uplift in business confidence and investment will take more effort.

But the party is committed to maintaining Labour's levels of public spending, and in recent weeks leading Conservatives have chanted the mantra of 'no tax cuts' in the first term of a Tory administration. That begs the question of business and Middle Britain support. There is a powerful case for slashing Corporation Tax from the current level of 28% nearer to the 18% average across greater Europe. Indeed, such a move may well be forced on Westminster whether the main parties champion it or not.

The Feel-Goods were won over to Labour by a promise of fresh start and an end to 'sleaze'. With the main opposition party committed to a programme of 'business as usual', coaxing back the Feel-Goods is going to be a mighty struggle.