China has been an economic powerhouse in recent decades – a powerhouse that has helped to drive the world economy through trade and both inward and outward investment. At the same time, its low-priced exports have helped to dampen world inflation. But is all this changing? Is China, to use President Biden’s words, a ‘ticking time bomb’?
China’s economic growth rate is slowing, with the quarterly growth in GDP falling from 2.2% in Q1 this year to 0.8% in Q2. Even though public-sector investment rose by 8.1% in the first six months of this year, private-sector investment fell by 0.2%, reflecting waning business confidence. And manufacturing output declined in August. But, despite slowing growth, the Chinese government is unlikely to use expansionary fiscal policy because of worries about growing public-sector debt.
The property market
One of the biggest worries for the Chinese economy is the property market. The annual rate of property investment fell by 20.6% in June this year and new home prices fell by 0.2% in July (compared with June). The annual rate of price increase for new homes was negative throughout 2022, being as low as minus 1.6% in November 2022; it was minus 0.1% in the year to July 2023, putting new-home prices at 2.4% below their August 2021 level. However, these are official statistics. According to the Japan Times article linked below, which reports Bloomberg evidence, property agents and private data providers report much bigger falls, with existing home prices falling by at least 15% in many cities.
Falling home prices have made home-owners poorer and this wealth effect acts as a brake on spending. The result is that, unlike in many Western countries, there has been no post-pandemic bounce back in spending. There has also been a dampening effect on local authority spending. During the property boom they financed a proportion of their spending by selling land to property developers. That source of revenue has now largely dried up. And as public-sector revenues have been constrained, so this has constrained infrastructure spending – a major source of growth in China.
The government, however, has been unwilling to compensate for this by encouraging private investment and has tightened regulation of the financial sector. The result has been a decline in new jobs and a rise in unemployment, especially among graduates, where new white collar jobs in urban areas are declining. According to the BBC News article linked below, “In July, figures showed a record 21.3% of jobseekers between the ages of 16 and 25 were out of work”.
Deflation
The fall in demand has caused consumer prices to fall. In the year to July 2023, they fell by 0.3%. Even though core inflation is still positive (0.8%), the likelihood of price reductions in the near future discourages spending as people hold back, waiting for prices to fall further. This further dampens the economy. This is a problem that was experienced in Japan over many years.
Despite slowing economic growth, Chinese annual growth in GDP for 2023 is still expected to be around 4.5% – much lower than the average rate for 9.5% from 1991 to 2019, but considerably higher than the average of 1.1% forecast for 2023 for the G7 countries. Nevertheless, China’s exports fell by 14.5% in the year to July 2023 and imports fell by 12.5%. The fall in imports represents a fall in exports to China from the rest of the world and hence a fall in injections to the rest-of-the-world economy. Currently China’s role as a powerhouse of the world has gone into reverse.
Articles
Questions
- Using PowerPoint or Excel, plot the growth rate of Chinese real GDP, real exports and real imports from 1990 to 2024 (using forecasts for 2023 and 2024). Use data from the IMF’s World Economic Outlook database. Comment on the figures.
- Explain the wealth effect from falling home prices.
- Why may official figures understate the magnitude of home price deflation?
- Explain the foreign trade multiplier and its relevance to other countries when the volume of Chinese imports changes. What determines the size of this multiplier for a specific country?
- How does the nature of the political system in China affect the likely policy response to the problems identified in this blog?
- Is there any good news for the rest of the world from the slowdown in the Chinese economy?
The latest consumer confidence figures from the European Commission point to consumer confidence in the UK remaining at around its long-term average. Despite this, confidence is markedly weaker than before the outcome of the EU referendum. Yet, the saving ratio, which captures the proportion of disposable income saved by the household sector, is close to its historic low. We consider this apparent puzzle and whether we can expect the saving ratio to rise.
The European Commission’s consumer confidence measure is a composite indicator based on the balance of responses to 4 forward-looking questions relating to the financial situation of households, the general economic situation, unemployment expectations and savings.
Chart 1 shows the consumer confidence indicator for the UK. The long-term average (median) of –6.25 shows that negative responses across the four questions typically outweigh positive responses. In October 2018 the confidence balance stood at –5.2, essentially unchanged from its September value of –5.8. While above the long-term average, recent values mark a weakening in confidence from levels before the EU referendum. At the beginning of 2016 the aggregate confidence score was running at around +4. (Click here to download a PowerPoint of the chart.)
Chart 1 shows two periods where consumer confidence fell markedly. The first was in the early 1990s. In 1990 the UK joined the Exchange Rate Mechanism (ERM). This was a semi-fixed exchange rate system whereby participating EU countries allowed fluctuations against each other’s currencies, but only within agreed bands, while being able to collectively float freely against all other currencies. In attempting to staying in the ERM, the UK was obliged to raise interest rates in order to protect the pound. The hikes to rates contributed to a significant dampening of aggregate demand and the economy slid into recession. Britain crashed out of the ERM in September 1992.
The second period of declining confidence was during the global financial crisis in the late 2000s. The retrenchment among financial institutions meant a significant tightening of credit conditions. This too contributed to a significant dampening of aggregate demand and the economy slid into recession. Whereas the 1992 recession saw the UK national output contract by 2.0 percent, this time national output fell by 6.3 per cent.
The collapses in confidence from 1992 and from 2007/08 are likely to have helped propagate the effects of the fall in aggregate demand that were already underway. The weakening of confidence in 2016 is perhaps a better example of a ‘confidence shock’, i.e. a change in aggregate demand originating from a change in confidence. Nonetheless, a fall in confidence, whether it amplifies existing shocks or is the source of the shock, is often taken as a signal of greater economic uncertainty. If we take this greater uncertainty to reflect a greater range of future income outcomes, including potential income losses, then households may look to insure themselves by increasing current saving.
It is usual to assume that people suffer from diminishing marginal utility of total consumption. This means that while total satisfaction increases as we consume more, the additional utility from consuming more (marginal utility) decreases. An implication of this is that a given loss of consumption reduces utility by more than an equivalent increase in consumption increases utility. This explains why people prefer more consistent consumption levels over time and so engage in consumption smoothing. The utility, for example, from an ‘average’ consumption level across two time periods, is higher, than the expected utility from a ‘low’ level of consumption in period 1 and a ‘high’ level of consumption in period 2. This is because the loss of utility from a ‘low’ level of consumption relative to the ‘average’ level is greater than the additional utility from the ‘high’ level relative to the ‘average’ level.
If greater uncertainty, such as that following the EU referendum, increases the range of possible ‘lower’ consumption values in the future even when matched by an increase in the equivalent range of possible ‘higher’ consumption values, then expected future utility falls. The incentive therefore is for people to build up a larger buffer stock of saving to minimise utility losses if the ‘bad state’ occurs. Hence, saving which acts as a from of self-insurance in the presence of uncertainty is known as buffer-stock saving or precautionary saving.
Chart 2 plots the paths of the UK household-sector saving ratio and consumer confidence. The saving ratio approximates the proportion of disposable income saved by the household sector. What we might expect to see if more uncertainty induces buffer-stock saving is for falls in confidence to lead to a rise in the saving ratio. Conversely, less uncertainty as proxied by a rise in confidence would lead to a fall in the saving ratio. (Click here to download a PowerPoint of the chart.)
The chart provides some evidence that of this. The early 1990s and late 2000s certainly coincided with both waning confidence and a rising saving ratio. The saving ratio rose to as high as 15.2 per cent in 1993 and 12.0 per cent in 2009. Meanwhile the rising confidence seen in the late 1990s coincided with a fall in the saving ratio to 4.7 per cent in 1999.
As Chart 2 shows, the easing of confidence since 2016 has coincided with a period where the saving ratio has been historically low. Across 2017 the saving ratio stood at just 4.5 per cent. In the first half of 2018 the ratio averaged just 4.2 per cent. While the release of the official figures for the saving ratio are less timely than those for confidence, the recent very low saving ratio may be seen to raise concerns. Can softer confidence data continue to co-exist with such a low saving ratio?
There are a series of possible explanations for the recent lows in the saving ratio. On one hand, the rate of price inflation has frequently exceeded wage inflation in recent years so eroding the real value of earnings. This has stretched household budgets and limited the amount of discretionary income available for saving. On the other hand, unemployment rates have fallen to historic lows. The rate of unemployment in the three months to August stood at 4 per cent, the lowest since 1975. Unemployment expectations are important in determining levels of buffer stock saving because of the impact of unemployment on household budgets.
Another factor that has fuelled the growth of spending relative to income, has been the growth of consumer credit. In the period since July 2016, the annual rate of growth of consumer credit, net of repayments, has averaged 9.7 per cent. Behavioural economists argue that foregoing spending can be emotionally painful. Hence, spending has the potential to exhibit more stickiness than might otherwise be predicted in a more uncertain environment or in the anticipation of income losses. Therefore, the reluctance or inability to wean ourselves off credit and spending might be a reason for the continuing low saving ratio.
We wait to see whether the saving ratio increases over the coming months. However, for now, the UK household sector appears to be characterised by low saving and fragile confidence. Whether or not this is a puzzle, is open to question. Nonetheless, it does appear to carry obvious risks should weaker income growth materialise.
Articles
Questions
- Draw up a series of factors that you think might affect consumer confidence.
- Which of the following statements is likely to be more accurate: (a) Consumer confidence drives economic activity or (b) Economic activity drives consumer confidence?
- What macroeconomic indicators would those compiling the consumer confidence indicator expect the indicator to predict?
- How does the diminishing marginal utility of consumption (or income) help explain why people engage in buffer stock saving (precautionary saving)?
- How might uncertainty affect consumer confidence?
- How does greater income uncertainty affect expected utility? What affect might this have on buffer stock saving?
These are challenging times for business. Economic growth has weakened markedly over the past 18 months with output currently growing at an annual rate of around 1.5 per cent, a percentage point below the long-term average. Spending power continues to be squeezed, with the annual rate of inflation in October reported to be running at 3.1 per cent compared to annual earnings growth of 2.5 per cent (see the squeeze continues). Moreover, consumer confidence remains fragile with households continuing to express particular concerns about the general economy and unemployment.
Here, we update our blog of July 2016 which, following the UK vote to leave the European Union, noted the fears for UK growth as confidence fell sharply. Consumer confidence is frequently identified by macro-economists as an important source of economic volatility. Indeed many macro models use a change in consumer confidence as a means of illustrating how economic shocks affect a range of macro variables, including growth, employment and inflation. Many economists agree that, in the short term at least, falling levels of confidence adversely affect activity because aggregate demand falls as households spend less.
The European Commission’s confidence measure is collated from questions in a monthly survey. In the UK around 2000 individuals are surveyed. Across the EU as a whole over 41 000 people are surveyed. In the survey individuals are asked a series of 12 questions which are designed to provide information on spending and saving intentions. These questions include perceptions of financial well-being, the general economic situation, consumer prices, unemployment, saving and the undertaking of major purchases.
The responses elicit either negative or positive responses. For example, respondents may feel that over the next 12 months the financial situation of their household will improve a little or a lot, stay the same or deteriorate a little or a lot. A weighted balance of positive over negative replies can be calculated. The balance can vary from -100, when all respondents choose the most negative option, to +100, when all respondents choose the most positive option.
The European Commission’s principal consumer confidence indicator is the average of the balances of four of the twelve questions posed: the financial situation of households, the general economic situation, unemployment expectations (with inverted sign) and savings, all over the next 12 months. These forward-looking balances are seasonally adjusted. The aggregate confidence indicator is thought to track developments in households’ spending intentions and, in turn, likely movements in the rate of growth of household consumption.
Chart 1 shows the consumer confidence indicator for the UK. The long-term average of –8.6 shows that negative responses across the four questions typically outweigh positive responses. In November 2017 the confidence balance stood at -5.2 roughly on par with its value in the previous two months, though marginally up on values of close to -7 over the summer. However, as recently as the beginning of 2016 the aggregate confidence score was running at around +4. In this context, current levels do constitute a significant change in consumer sentiment, changes which do ordinarily mark similar turning points in economic activity.(Click here to download a PowerPoint of the chart.)
Chart 2 allows to look behind the European Commission’s headline confidence indicator for the UK by looking at its four component balances. From it, we can see a deterioration in all four components. However, by far the most significant change in the individual confidence balances has been the sharp deterioration in expectations for the general economy. In November the forward-looking general economic situation stood at -25.5, compared to its long-run average of -11.6. (Click here to download a PowerPoint of the chart.)
The fall in UK consumer confidence is even more stark when compared to developments in consumer confidence across the whole of the European Union and in the 19 countries that make up the Euro area. Chart 3 shows how UK consumer confidence recovered relatively more strongly following the financial crisis of the late 2000s. The headline confidence indicator rose strongly from the middle of 2013 and was consistently in positive territory during 2014, 2015 and into 2016. The fall in consumer confidence in the UK has seen the headline confidence measure fall below that for the EU and the euro area. (Click here to download a PowerPoint of the chart.)
Consumer (and business) confidence is closely linked to uncertainty. The circumstances following the UK vote to leave the EU have undoubtedly created the conditions for acute uncertainty. Uncertainty breeds caution. Economists sometimes talk about spending being affected by two conflicting motives: prudence and impatience. While impatience creates a desire for spending now, prudence pushes us towards saving and insuring ourselves against uncertainty and unforeseen events. The worry is that the twin forces of fragile confidence and squeezed real earning are weighting heavily in favour of prudence and patience (a reduction in impatience). Going forward, this could create the conditions for a sustained period of subdued growth which, if it were to impact heavily on firms’ investment plans, could adversely impact on the economy’s productive potential. The hope is that the Brexit negotiations can move apace to reduce uncertainty and limit uncertainty’s adverse impact on economic activity.
Articles
UK consumer confidence slips in December – Thomson Reuters/Ipsos Reuters (14/12/17)
UK consumer confidence drops to lowest level since Brexit result Independent, Ben Chu (30/11/17)
2017 set to be worst year for UK consumer spending since 2012, Visa says Independent, Josie Cox, (11/12/17)
Carpetright boss warns of ‘fragile’ consumer confidence after profits plunge Telegraph, Jack Torrance (12/12/17)
UK consumers face sharpest price rise in services for nearly a decade Guardian, Richard Partington (5/12/17)
UK average wage growth undershoots inflation again squeezing real incomes Independent, Josie Cox (13/12/17)
Bank sees boost from Brexit progress BBC News (14/12/17)
Data
Business and Consumer Surveys European Commission
Questions
- Draw up a series of factors that you think might affect consumer confidence.
- Explain what you understand by a positive and a negative demand-side shock. How might changes in consumer confidence generate demand shocks?
- Analyse the ways in which consumer confidence might affect economic activity.
- Which of the following statements is likely to be more accurate: (a) Consumer confidence drives economic activity or (b) Economic activity drives consumer confidence?
- What macroeconomic indicators would those compiling the consumer confidence indicator expect the indicator to predict?
- Analyse the possible short-term and longer-term economic implications of a fall in consumer confidence.
- How might uncertainty affect consumer confidence?
- What do the concepts of impatience and prudence mean in the context of consumer spending? When consumer confidence falls which of these might become more significant for consumer spending?
In our blog What can we read into signs of easing consumer confidence? we noted the slight easing in consumer confidence that had occurred since the autumn of last year. Nonetheless, at that time, survey data from the European Commission was continuing to show consumer confidence levels still well above their long-run average. However, following the UK vote to leave the European Union consumer confidence has fallen sharply and now the headline confidence indicator has fallen below its long-term average for the first time since June 2013.
We take this opportunity to update our May blog to better understand the extent and nature of the decline in confidence. The importance of confidence changes is typically modelled by economists in their models of the macroeconomy as a demand-side shock. Falling consumer confidence would be expected to dampen an economy’s output levels since aggregate demand falls as households spend less. Consequently, a marked fall in confidence amounts to a negative demand-side shock.
The European Commission’s confidence measure is collated from questions in a monthly survey. In the UK around 2000 individuals are surveyed. Across the current 28 member states over 41 000 people are surveyed.
In the survey individuals are asked a series of 12 questions which are designed to provide information on spending and saving intentions. These questions include perceptions of financial well-being, the general economic situation, consumer prices, unemployment, saving and the undertaking of major purchases.
The responses elicit either negative or positive responses. For example, respondents may feel that over the next 12 months the financial situation of their household will improve a little or a lot, stay the same or deteriorate a little or a lot. A weighted balance of positive over negative replies can be calculated. The balance can vary from –100, when all respondents choose the most negative option, to +100, when all respondents choose the most positive option.
The European Commission’s principal consumer confidence indicator is the average of the balances of four of the twelve questions posed: the financial situation of households, the general economic situation, unemployment expectations (with inverted sign) and savings, all over the next 12 months. These forward-looking balances are seasonally adjusted.
Sometimes other combinations of the 12 questions are averaged to produce alternative headline confidence numbers (see, for example, the newspaper articles below). These may include a mix of forward and backward-looking questions. However, in this blog we report on the European Commission’s principal confidence indicator as outlined above. The intention is that this or any other confidence indicator tracks developments in households’ spending intentions and, in turn, likely changes in the rate of growth of household consumption.
Chart 1 shows the consumer confidence indicator for the UK. The long-term average of –8.7 shows that negative responses across the four questions typically outweigh positive responses.
In July the confidence balance stood at –9.2 down from –1.2 in June. This 8 point fall is the largest monthly fall in this particular headline indicator since January 1991 when it fell 11 points. The fall also means that not only do negative responses now dominate but more so than is usual. The fall in confidence is therefore very stark indeed. (Click here to download a PowerPoint of the chart.)
Chart 2 is important because it enables us to see what drives the European Commission’s headline confidence indicator for the UK by looking at its four component balances. The sharp decline in confidence is reflected in a deterioration in all four components. (Click here to download a PowerPoint of the chart.)
The most notable change in the individual confidence balances is the sharp deterioration in expectations for the general economy. In July the forward-looking general economic situation balance fell to –29.9 having stood at –15.7 in June. As recently as last December it registered –1.4. This is the lowest forward-looking general economy confidence balance since October 2012, though still some way above the –50.1 reported in July 2008 when the financial crisis was unfolding.
Alongside the 14 point drop in the balance for general economy expectations, the UK experienced 8 point drops in both the balances for households’ financial expectations and the expectations of saving over the next 12 months. In other words, households expect to become financially poorer and less able to save.
The monthly survey contains other questions that can help to predict future spending patterns. For example, we might expect the responses to questions relating to perceptions around what the survey call ‘major purchases’ to give us some important insight in households’ financial well-being and spending plans. ‘Major purchases’ are taken to be items such as furniture, electrical goods and electronic devices.
Chart 3 shows the balances to both whether now is the right time to make major purchases and to whether respondents expect to spend more on major purchases in the coming 12 months compared to the past 12 months. July’s data show a marked deterioration in sentiment towards making major purchases. The balance relating to whether now is the right time to make major purchases fell by 6.5 points, the largest fall since December 2011, while the forward-looking major purchase balance fell by 4.6 points, the largest fall since January 2011. (Click here to download a PowerPoint of the chart.)
The fall in the major purchases balances is consistent with the idea that households are feeling a sense of heightened uncertainty. The implication of this is that households will tend to be more cautious, cutting back on expenditures, including major purchases.
The magnitude of the fall in UK consumer confidence following the outcome of the EU referendum on 23 June is even more stark when compared to developments in consumer confidence across the 28 member states of the European Union and in the 19 countries that make up the Euro area.
Chart 4 shows how UK consumer confidence recovered relatively more strongly following the financial crisis of the late 2000s. The headline confidence indicator rose strongly from the middle of 2013 and, as we noted earlier, was consistently in positive territory during 2014 and remained so at the start of this year. The slump in consumer confidence in the UK means that the headline confidence measure has now fallen below that across the EU as well as that in the euro area. In fact, confidence in the euro area has been consistently between –7 or –9 for the past six months. (Click here to download a PowerPoint of the chart.)
Interest now turns to whether the slump in confidence in the UK will persist or, worse still, deepen further. The implied negative impact on aggregate demand would be expected to translate into weaker growth. The concern therefore is the extent to which we can expect UK growth to weaken in the months ahead. The prospect of weaker growth is likely to influence economic policy.
The government has already talked about ‘resetting fiscal policy’ which can be taken to mean a relative loosening in its fiscal policy relative to the Government’s original plans. Similarly we might yet see a further loosening of monetary policy. While the Bank of England’s Monetary Policy Committee held the official Bank Rate at 0.5 per cent at its July meeting, many commentators expect a cut sooner rather than later. The confidence data will be one important consideration in the Bank’s calculations.
Articles
UK sees biggest fall in consumer confidence for 26 years after Brexit vote The Guardian, Katie Allen (29/7/16)
UK consumer confidence takes biggest drop since 1990s ITV News (29/7/16)
Consumer confidence suffers biggest drop in 26 years after Brexit vote The Telegraph, Szu Ping Chan (29/7/16)
Consumer confidence slides at fastest pace in 26 years after Brexit vote Indepedent, Ben Chu (29/7/16)
Housing Outlook ’Uncertain’ as Brexit Hits Consumer Confidence Bloomberg, Charlotte Ryan (28/7/16)
Brexit Sees U.K. Consumer Confidence Fall Most Since 1990 Bloomberg, Charlotte Ryan (29/7/16)
Consumer confidence nosedives in Scotland in wake of Brexit vote Herald Scotland, Helen McArdle (29/7/16)
Data
Business and Consumer Surveys European Commission
Questions
- Draw up a series of factors that you think might affect consumer confidence.
- Analyse the ways in which consumer confidence might affect economic activity.
- Explain what you understand by a positive and a negative demand-side shock. How might changes in consumer confidence initiate demand shocks?
- Which of the following statements is likely to be more accurate? (a) Consumer confidence drives economic activity. (b) Economic activity drives consumer confidence.
- What macroeconomic indicators would those compiling the consumer confidence indicator hope that the indicator would help to predict?
- Analyse the possible economic implications of the fall in consumer confidence following the EU referendum vote.
- What economic effects might any persistence in the fall in consumer confidence have?
Economists spend a lot of time analysing consumers’ spending intentions. This is unsurprising given that UK household consumption is the equivalent to around two-thirds of Gross Domestic Product. One factor that is argued to affect spending decisions is consumer confidence. Despite a slight easing in recent months, survey data from the European Commission continue to show relatively high confidence levels among UK households. This follows a surge in consumer confidence during 2013 and into 2014.
Rising consumer confidence is identified frequently by economists as a positive demand-side shock. Therefore, rising confidence would be expected to boost an economy’s output levels as aggregate demand rises. The opposite holds for falling consumer confidence which is an example of a negative demand-side shock.
Given the impact that confidence can have on economies it is important to have measures which might be thought, however imperfectly, to capture consumer confidence. The European Commission’s confidence measure involves a monthly survey of around 2000 individuals in the UK. Across the 28 member states over 41 000 people are surveyed.
In the survey individuals are asked a series of 12 questions which are designed to provide information on spending and saving intentions. These questions include perceptions of financial well-being, the general economic situation, consumer prices, unemployment, saving and the undertaking of major purchases.
The responses elicit either negative or positive responses. For example, respondents may feel that over the next 12 months the financial situation of their household will improve a little or a lot, stay the same or deteriorate a little or a lot. A weighted balance of positive over negative replies can be calculated. The balance can vary from –100, when all respondents choose the most negative option, to +100, when all respondents choose the most positive option.
The European Commission’s consumer confidence indicator is the average of the balances of four of the twelve questions posed: the financial situation of households, the general economic situation, unemployment expectations (with inverted sign) and savings, all over the next 12 months. The balances are seasonally adjusted.
Chart 1 shows the consumer confidence indicator for the UK. The long-term average of –8.8 shows that negative responses across the four questions typically outweigh positive responses. However, the current confidence balance is just above zero at +0.8. So, as well as indicating a generally positive disposition across UK households, confidence levels are well above the long-term average. (Click here to download a PowerPoint of the chart.)
Chart 2 enables us to see what has been driving the European Commission’s confidence indicator for the UK by looking at its four component balances. From it we can see that the boost to confidence in 2013 and 2014 coincided with a dramatic improvement in expectations of the general economic situation in the year ahead and a rapidly falling proportion of respondents expecting unemployment to rise.
The easing in confidence since the turn of the year appears largely to be the result of deteriorating expectations over the general economy. In April the forward-looking general economic situation balance had fallen to –12.5 the lowest balance since June 2013. The deterioration in this balance slightly lags the growing belief that unemployment will rise over the next 12 months, which began to take hold last Autumn. Some commentators argue these trends might reflect the uncertainty caused by the EU referendum to be held in the UK on 23 June. (Click here download a PowerPoint of the chart.)
The monthly survey contains other questions that can help to predict future spending patterns. For example, we might expect the responses to questions relating to perceptions around what the survey called ‘major purchases’ to give us some important insight in households’ financial well-being and spending plans. ‘Major purchases’ are taken to be items such as furniture, electrical goods and electronic devices.
Chart 3 shows the balances to both whether now is the right time to make major purchases and to whether respondents expect to spend more on major purchases in the coming 12 months compared to the past 12 months. We can see a marked improvement in sentiment from around the middle of 2013.(Click here to download a PowerPoint of the chart.)
By the start of 2015 there was a positive balance of individuals feeling that now was the right time to make major purchases. While this balance remained positive in April 2016 at +5.9 this was down from +11.7 back in January. Meanwhile, the forward-looking major purchase balance has fallen slightly in each of the last three months. But, it is still on a par with levels at the end of 2015. Hence, it is perhaps a little too early to talk of any significant easing of forward-looking sentiment around more major purchases having yet become established.
Taking the two major purchase balances together the tentative evidence points to a relatively mild easing in sentiment. This is consistent with the overall consumer confidence indicator.
It would seem that while consumer confidence has eased a touch from the highs of the past couple of years, confidence levels remain strong. Nonetheless, policymakers will be keeping a very keen eye on any signs that this easing in confidence is becoming entrenched with its implications for weaker consumption growth.
Articles
Brexit and euro zone worries weigh on UK consumers Reuters, (31/3/16)
Brexit’s Mixed Messages Depress Consumer Confidence, GfK Says Bloomberg, Fergal O’Brien (29/4/16)
UK consumer confidence stumbles Herald Sun, Dan Cancian (25/4/16)
Consumer ‘depression’ mounts over uncertain economy The Telegraph, Szu Ping Chan (29/4/16)
Consumer confidence at zero as Brexit fears ‘hit home’ The Telegraph, Szu Ping Chan (31/3/16)
Consumer confidence in UK at lowest level in 15 months, survey suggests Guardian, Katie Allen (29/4/16)
Data
Business and Consumer Surveys European Commission
Questions
- Draw up a series of factors that you think might affect consumer confidence.
- Analyse the ways in which consumer confidence might affect economic activity.
- Explain what you understand by a positive and a negative demand-side shock. How might changes in consumer confidence initiate demand shocks?
- Which of the following statements is likely to be more accurate? (a) Consumer confidence drives economic activity. (b) Economic activity drives consumer confidence.
- What macroeconomic indicators would those compiling the consumer confidence indicator hope that the indicator would help to predict?
- In recent times expectations about the path of the economy have been less optimistic. Yet at the same time more people are positive about how their financial situation will develop. What might explain this apparent contradiction?
- What might the long-term average value of the consumer confidence indicator reveal about peoples’ natural perceptions and expectations of their well-being?