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A Confidence Conundrum

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By Peter G Hall
Vice-President and Chief Economist Export Development Canada

Just over a week ago, it was Super Tuesday for consumer confidence. Numbers were released for the UK, France, the EU as a whole, and the US. The data fluctuates with the ups and downs of the news streams, like stock market corrections, the Greek fiasco, geopolitical incidents, and brighter-than-expected economic releases. The big news on both consumer and business confidence is passé. It has long since left the doldrums of the post-crisis period; it recovered long ago. So why didn’t the world economy recover along with it?

To put things in context, let’s quickly review the recent odyssey of confidence. After riding high, confidence collapsed as the economic and financial crisis hit the world. American consumer sentiment plunged to levels not seen in recent history; they could best be labeled depressionary readings. Recovery ensued, but only to recessionary levels, and they parked there for years. In Europe, similar initial moves, but in their case, stimulus brought a normalization of confidence that was short-lived. When the reality of stagnant growth set in, there was a re-weakening of the collective psyche, potentially more damaging than America’s protracted funk. It was a great day smack in the middle of 2013 when US consumer confidence crossed the ‘normal’ threshold, and moved solidly north. The timing was similar for Europe, quite in spite of its nagging constraints. So, why no economic effects?

No one doubts the necessity of confidence to the operation of an economy. Without it, fractional banking systems implode. Mere rumours of a shortage of key goods are enough to create a run on the retail distribution system, whether the rumours are true or not. Confidence governs movements of critical financial variables. Indeed, central banks were created primarily to guard and protect – read: instill confidence in – the value of the local currency. In many more facets of life, confidence is critical.

However, confidence is less easy to pin down than tangible movements of goods and services, prices, and a host of other variables. Its weakness is subjectivity. Confidence always and everywhere has a context that is determined by a complex set of inputs. Consider the post-Depression context. Consumers and businesses might have registered confidence once the worst was over, but the shock of seeing wealth evaporate permanently changed the meaning of confidence. It certainly wasn’t a return to no-holds-barred ‘roaring ‘20’s’ confidence; it was far more measured. Similarly, today’s confidence has etched in it the scars of our recent crisis and multiple years of frustration afterward. In spite of the indexes, jitters remain. Companies and consumers have money, but they are holding on to a lot more of it than they really need to.

There is also an age dimension to confidence. It’s not measured, but there are anecdotes aplenty. The young are victims of a jobless recovery. The aging are less employable, and their savings are having a hard time earning a decent yield, thanks to low interest rates. It’s quite possible that aggregate confidence is selective, and under-represents the disaffected.

The subjectivity of confidence also has an intergenerational element. Culture changes, and with successive generations, confidence means different things. Sure, the questions on the surveys are the same, and they are as simple as possible. But different generations can have varied opinions of what words like ‘better’ and ‘worse’ really mean.

Whether or not these reasons are definitive explanations, what currently stands is a confidence conundrum: by all indications, sentiment has improved on a broad basis, but the economy is not taking the bait. There’s little doubt that it will, and if the past is any guide, it’s likely to happen in one giant rush. But today’s void between confidence and activity has a sinister underside: any significant disruption of current activity, such as it is, could provoke a sudden retrenchment of confidence. If sustained, it would be close to the last thing our structurally-precarious post-crisis economy needs.

The bottom line? Confidence is an economic grey-zone. You certainly can’t have growth without it. But today’s data show that you can have it, and not necessarily see solid growth. That makes it a necessary but not sufficient condition of growth. Let’s hope that our collective gut-feel proves to be well-founded.


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