So how are you feeling? Is now a good time to shop? Or, is it perhaps time to put money aside for that rainy day? Well, these types of questions capture the essence of what we might label as ‘sentiment’ or ‘confidence’. Polling organisations each month undertake surveys to try to measure sentiment amongst consumers and businesses. In doing so, they ask questions relating to, amongst other things, perceptions as to the current and future states of the economy, the labour market and finances. The responses to these individual questions are then combined to give an overall indicator which, it is then hoped, can be used to track sentiment over time. Two widely reported surveys of sentiment are the EU economic sentiment indicator and the Nationwide Building Society consumer confidence indicator.
The Nationwide’s indicator focuses solely on households. Its sentiment figure for March suggests that the gains in confidence amongst households enjoyed in the first couple of months of this year have been lost. In other words, the decline in March was significant enough not only to wipe out the effect of the typical ‘January bounce’ seen in most measures of sentiment but also the further rise that occurred in February. Nonetheless, consumer sentiment remains above the levels seen through much of 2008 and 2009 amidst the economic downturn.
The European Union’s economic sentiment index measures sentiment across both households and firms, although separate indicators are available for households and for different sectors of industry. Figures are also available for each individual EU country as well as across the EU. 2009 saw a record low score in the UK for the economic sentiment index – a series which goes back to 1985. But in March 2010 the sentiment index was, perhaps surprisingly, above its long-term average. Interestingly, this reflects further strengthening in sentiment amongst businesses, while sentiment amongst consumers fell slightly in March after recent gains.
So what should we read into these sentiment indices? Well, firstly, consider the patterns in the sentiment scores. The sentiment indices rose markedly in the second half of last year and into the beginning of this year, although sentiment amongst households may have now weakened while continuing to rise amongst firms. Now, secondly, consider these patterns alongside evidence which shows that economic sentiment indices tend to track the direction of economic growth. So last year, the rise in both the EU and Nationwide sentiment indices was indeed mirrored by improvements in the rate of economic growth with initially smaller contractions followed by positive growth in the final quarter.
One of the advantages of these sentiment measures is their timeliness. The first provisional estimate of growth in Q1 2010 is not available until the end of this month and, of course, is then subject to revision. But, if we reflect on the sentiment measures, the fact that sentiment appears no weaker across the first quarter of this year as a whole and, when measured across both households and firms, may actually be higher, indicates that the growth number for the first quarter of this year may not be too different from the 0.4% growth recorded in Q4 2009. Stay cheerful!
Articles
Consumer confidence has sharpest fall this recession The Times, Grainne Gilmore (15/4/10)
U.K. consumer confidence fell in March The Wall Street Journal, Paul Hannon (15/4/10)
Election drives down consumer confidence Sky News, Adam Arnold (15/4/10) )
Consumer morale suffers biggest fall since July 2008 Reuters UK (15/4/10)
Data
Business and Consumer Surveys The Directorate General for Economic and Financial Affairs, European Commission
Consumer Confidence Nationwide Building Society
Questions
- What factors do you think might influence sentiment or confidence amongst households?
- What factors might affect sentiment or confidence amongst businesses?
- In what ways do you think sentiment and economic activity might be connected?
- Some commentators are arguing that the general election might be impacting on consumer confidence. Why do you think this might be the case?
- If you were going to assess the economic sentiment of consumers or businesses, what sorts of questions do you think you might ask?
Housing Equity Withdrawal, or HEW for short, is new borrowing that is secured against property which is not reinvested in the housing market. In other words, it is borrowed money that is not used by households to purchase property or to undertake major refurbishments, such as extensions to existing residential properties. The latest HEW statistical release from the Bank of England shows that HEW in Q4 2009 was again negative, making it the seventh consecutive quarter of negative HEW. But, what does a negative HEW figure mean?
Negative HEW occurs when the total saving by households in housing (either by paying back mortgages or by purchasing property directly without borrowing) is greater than new borrowing secured against housing. It results in an increase in housing equity held by the household sector. In the fourth quarter of 2009, the Bank’s seasonally-adjusted figures show that negative HEW was just over £4.3 billion, equivalent to 1.6% of disposable income.
But why might the household sector have wanted to save through housing and how might this impact on consumer spending? In truth there is no single reason, but one potentially important reason is likely to be the sector’s desire to rebuild its balance sheets. In times of uncertainty, such as those that we face now, a perfectly understandable response by households is to try to reduce their exposure to debt. During the seven quarters in which HEW has been negative, households have used housing as a vehicle for saving to the tune of £36.5 billion, equivalent to 2.2% of the sector’s disposable income. To some extent the fact that, as a result of the banking crisis, house-buyers have had to put down larger deposits when purchasing housing helps to reduce their exposure to debt. But, the extent of the negativity of HEW means that households more generally have been actively looking to repay some of their outstanding mortgage debt.
So what of the impact of HEW on consumer spending? Negative sums of HEW mean that consumers are either reducing consumer spending, reducing holdings of financial assets, increasing levels of unsecured debt (e.g. personal loans or credit card debt) or, of course, undertaking some combination of these. Given that the stock of unsecured debt has actually declined by £7.9 billion to £224.8 billion in the 12 months to February, the impact would seem to be falling on consumer spending.
Some commentators are pointing to the weakening pace with which households are saving through housing. The current level of saving through housing is, as we said earlier, equivalent to 1.6% of disposable income, down from the 3.0% recorded in both Q4 2008 and Q1 2009. But, this would seem to simply highlight the extent of the precautionary behaviour by households in the midst of the economic downturn. It would be a surprise to see any significant end soon to the UK household sector’s precautionary behaviour.
Articles
Britons plough cash into repaying debt The Times, James Charles (6/4/10)
The great mortgage payback Reuters, Harry Wallop (6/4/10)
Home owners’ housing equity still increasing BBC News (6/4/10) )
Brits pay off £4bn of mortgage debt Press Association (6/4/10)
UK Q4 housing injection smallest since Q2 2008 – BOE MarketNews.com (6/4/10)
Data
Housing equity withdrawal (HEW) statistical releases Bank of England
Questions
- Explain what are meant by positive and negative values of HEW.
- What implications might additions to housing equity have for consumer spending?
- What factors do you think lie behind the seven consecutive quarters of negative HEW?
- If house price inflation were to start picking up in the near future, would you expect to see positive values of HEW and, if so, how strongly positive?
- Other than through HEW, how might the housing and mortgage markets impact on consumer spending?
With an election approaching, there is much debate about recovery and cuts and about the relationships between the two. Will rapid cuts stimulate confidence in the UK by business and bankers and thereby stimulate investment and recovery, or will they drive the economy back into recession? The debate is not just between politicians vying for your vote; economists too are debating the issue. Many are taking to letter writing.
In the February 2010 news blog, A clash of ideas – what to do about the deficit, we considered three letters written by economists (linked to again below). There has now been a fourth – and doubtless not the last. This latest letter, in the wake of the Budget and the debates about the speed of the cuts, takes a Keynesian line and looks at the sustainability of the recovery – including social and environmental sustainability. It is signed by 34 people, mainly economists.
Letter: Better routes to economic recovery Guardian (27/3/10)
Letter: UK economy cries out for credible rescue plan Sunday Times, 20 economists (14/2/10)
Letter: First priority must be to restore robust growth Financial Times, Lord Skidelsky and others (18/2/10)
Letter: Sharp shock now would be dangerous Financial Times, Lord Layard and others (18/2/10)
Questions
- Summarise the arguments for making rapid cuts in the deficit.
- Summarise the arguments for making gradual cuts in the deficit in line with the recovery in private-sector demand.
- Under what conditions would the current high deficit crowd out private expenditure?
- What do you understand by a ‘Green New Deal’? How realistic is such a New Deal and would there be any downsides?
- Is the disagreement between the economists the result of (a) different analysis, (b) different objectives or (c) different interpretation of forecasts of the robustness of the recovery and how markets are likely to respond to alternative policies? Or is it a combination of two of them or all three? Explain your answer.
- Why is the effect of the recession on the supply-side of the economy crucial in determining the sustainability of a demand-led recovery?
At the start of the new decade, many commentators are getting out their crystal balls to take a look into the future. Below you will find a selection of their predictions, including six extracts from The Economist’s ‘The World in 2010’.
In 2009, the world economy shrank for the first time since 1945. Will it now bounce back, or will global recovery be slow, or will there be a ‘double-dip recession’ with output falling once more before sustained recovery eventally sets in? And what about particular economies? How will the UK fare compared with other countries? How will the USA and the eurozone perform? Will China and India be the powerhouses of global recovery?
Then there is the whole question of the financial sector. Is it now fixed? Will businesses and consumers have sufficient access to credit – is the credit crunch over? Has toxic debt been expunged from the banking system? Do banks now have sufficient capital?
And what about debt? Even though private-sector debt is falling in many countries as households and businesses scale back borrowing and as banks have imposed tighter lending criteria, public-sector debt is soaring around the world. Will financial markets continue to support these growing levels of sovereign debt? Will central banks have to continue with quantitative easing in order to support these levels of debt and to keep interest rates down?
Economic Outlook: 2010 may narrow gap Financial Times, Chris Flood (27/12/09)
CIPD Annual Barometer Forecast: UK economy to shed a further 250,000 jobs before unemployment peaks at 2.8 million in 2010 Chartered Institute of Personnel and Development (CIPD) (21/12/09)
Unemployment ‘set to peak in 2010’ Guardian (29/12/09)
Unemployment ‘will peak at 2.8m’ in 2010 BBC News (29/12/09)
What employment prospects lie ahead in 2010? BBC News, Shanaz Musafer (3/1/10)
Money printing scheme is working, Bank of England says Times Online, Gráinne Gilmore and Francesca Steele (1/1/10)
Bank optimism rises as credit to business eases Guardian, Ashley Seager (31/12/09)
The world in 2010: China continues its unstoppable economic charge Independent, Alistair Dawber (2/1/10)
The US slowly emerges from the gloom of 2009 Independent, Alistair Dawber (2/1/10)
Year dominated by weak dollar Financial Times, Anjli Raval (2/1/10)
A year when tipsters took a tumble Times Online, David Wighton (1/1/10)
PMEAC pegs growth at 8% in ’10-11 Times of India (2/1/10)
China and the other Brics will rebuild a new world economic order The Observer, Ashley Seager (3/1/10)
Five countries that crashed and burned in the credit crunch face a hard road to recovery The Observer, Heather Stewart, Ashley Seager, David Teather, Richard Wachman and Zoe Wood (3/1/10)
HSBC goes out on a limb and predicts growth beyond dreams of Chancellor Times Online, Gráinne Gilmore (2/1/10)
Uncertainty dogs sterling Financial Times, Peter Garnham (2/1/10)
A tough year to forecast as recovery hangs in the balance Scotsman, George Kerevan (30/12/09)
Unstable equilibrium in 2010 BBC News blogs, Peston’s Picks (30/12/09)
Intriguing economic questions for 2010 BBC News blogs, Stephanomics (23/12/09)
The hard slog ahead The Economist (13/11/09)
In the wake of a crisis The Economist (13/11/09)
Now for the long term The Economist, Matthew Bishop (13/11/09)
Recessionomics The Economist, Anatole Kaletsky (13/11/09)
The World in 2010: From the editor The Economist, Michael Pilkington (13/11/09)
The hard slog ahead The Economist (13/11/09)
For forecasts of various economies and regions see
World Economic Outlook (OECD)
European Economic Forecast – autumn 2009 (European Commission)
Tables set A and Tables set B from World Economic Outlook (IMF)
Questions
- What is likely to happen to the major economies of the world in 2010?
- How much reliance should be placed on macroeconomic forecasts for the medium term (1 or 2 years)?
- For what reasons might the UK economy fare (a) better or (b) worse than forecast?
- Why has unemployment risen less in the UK, and many other countries too, during the current recession compared to previous recessions? Does the flexibility of labour markets affect the amount that unemployment rises during a period of declining aggregate demand?
- Why may the world face a ‘long hard slog’ in recovering from recession?
- Why is the world in 2010 ‘balanced precariously’ and why are there huge uncertainties? (See Robert Peston’s blog.)
- Why are China and India likely to see much faster rates of economic growth than the USA, the EU and Japan?
- What is likely to happen to stock markets over the coming 12 months? What will be the main factors influencing the demand for and supply of shares?
- What fiscal and monetary policies are most appropriate during the coming 12 months?
Figures released by the Bank of England show that in the third quarter of 2009 UK households increased their housing equity (i.e. repaid mortgage debt) by £4.9 billion, equivalent to 2% of their disposable income. This was the sixth consecutive quarter in which saving in housing exceeded net mortgage lending. Interestingly, during each of these six quarters the UK economy contracted.
Saving in housing (or ‘negative housing equity withdrawal’ (HEW)) will reduce aggregate demand if it is funded out of income that would otherwise have been spent on consumer goods and services. Since the proportion of income saved, as measured by the saving ratio, climbed from an historic low of 0.9% in the third quarter of 2008 to 8.6% in the same quarter of 2009, increased saving in housing equity has been depressing spending levels. Indeed, across the six quarters in which HEW has been negative, households have increased their stock of housing equity by £33.9 billion, equivalent to 2.3% of disposable income – money which could otherwise have been spent.
Increased saving in housing by households is an example of the household sector’s attempt to repair its balance sheets. Another example has been the fall in the sector’s outstanding stock of unsecured debt (e.g. outstanding personal loans and credit-card debt). Elsewhere in the economy, banks too have been looking to repair their badly damaged balance sheets and, of course, there is the considerable interest in how the UK government will reduce its budget deficit. We can expect these repairs to balance sheets to have some impact on the pace of economic recovery. What is less certain is the size and duration of these balance sheet effects.
Home loan repayments ‘a priority’ BBC News (29/12/09)
Homeowners pay off £5bn of mortgage debt Financial Times, Vanessa Houlder (30/12/09)
Homeowners stop cashing in on the value of their homes Telegraph, Myra Butterworth (29/12/09)
Mortgages paid off at the fastest rate for 40 years Guardian, Larry Elliott (30/12/09)
Homeowners rush to repay mortgages thisismoney, Rosamund Urwin (29/12/09)
Questions
- What factors might explain why UK households have been increasing their saving in housing equity during 2009?
- Why might increasing amounts of HEW, such as those in the mid 2000s, not necessarily result in higher levels of consumer spending?
- What do you understand by the ‘household balance sheets’? What do you think is likely to be the most significant item on the sector’s balance sheets?