Consumer Confidence & Economic Cycles

Some of the factors influencing consumer confidence and the importance of sentiment in shaping turning points in cycles are explored in this video.

There are many factors that have an impact on the level and growth of household spending on goods and services in the macroeconomy.

• Real Disposable Income (i.e. Income adjusted for inflation & after direct taxes and benefits
• Employment and Job Security - When the labour market is improving, confidence and incomes improve
• Household Wealth - (e.g. house prices & share prices) – a rise in wealth can increase consumer demand
• Expectations and Sentiment - Economic uncertainty causes spending to fall, improving animal spirits will lift demand
• Interest Rates - Interest rates affect both the incentive to save and the cost of borrowing

Selection of risks to UK consumer confidence in 2020

1. Recession risk from coronavirus pandemic
2. Risk of a housing market downturn
3. Sharp falls in global share prices
4. Savers might be hit with negative interest rates on their deposits
5. Fears over long-term viability of pensions

Consumer confidence and turning points in the economic cycle

• Expectations of the future drives our behaviour today
• Fears of recession can lead to consumer behaviours that then make a recession more likely
• Households might save more of their income because ofuncertainty which then depresses aggregate demand forgoods and services which then has a negative effect on output, jobs and investment
• This is known as the paradox of thrift
• Much depends on extent to which macroeconomic policy responds:
• How effective are cuts in policy interest rates? (Now 0.25%)
• Is fiscal policy better at helping to stabilize confidence & demand?
• Temporary & targeted measures to help families andbusinesses
• Does a big policy stimulus now actually undermine confidence