The last few days have brought news of very weak consumer confidence on both sides of the Atlantic. In Britain, the GfK-NOP consumer confidence index fell in August for the third month in a row.
People are a lot gloomier about the economy than they were a year ago and, as Nick Moon of NOP points out, the current confidence reading of minus 31 has only been lower during the worst of the 2008-9 crisis and in the early 1990s. It is close to levels, in other words, that would normally presage a slide back into recession.
In America, if anything, the position is worse. The Conference Board’s index of consumer confidence slumped by 14.7 points last month to 44.5, its lowest since April 2009. US consumers, whose spending is still needed to keep the global economy going, are “fragile, fatigued and fed up”, according to one economist.
I have learned not to ignore these confidence measures. In the autumn of 2007, when no mainstream economist was forecasting outright recession, collapsing consumer confidence proved to be a reliable harbinger of the coming doom.
In Britain, one look at the queues outside Northern Rock branches in September 2007 was enough to convince people something serious was up. In America it took a little longer but the collapse in confidence also told a wider economic story.
So is it time to listen to what the confidence measures are saying and batten down the hatches? The first thing is to look deeper into the weakness in confidence.
August was a trime of alarms and uncertainty. In Britain, unsurprisingly, riots and looting made people uneasy. High inflation, with big utility price rises to come, are squeezing real incomes. The impact of “the cuts” is feared.
In America, the surprise was not that confidence fell but that it did not fall by more. US consumers are heavily affected by the stock market. The August market plunge, coupled with Standard & Poor’s unprecedented downgrade of America’s sovereign debt rating, sent US consumers into a mood into a gloomy mood. When people are being told every day the world is facing Armageddon, they are likely to feel a little downbeat. The same factors that induced panic buying of gold produced a panicky slump in confidence.
So some of the weakness of consumer confidence reflects temporary factors. Markets are not through the crisis but they have recovered ground. Britain’s bout of civil unrest will, one hopes, turn out to have been a moment of madness.
It is not all one way on inflation. Global commodity prices peaked three months ago. There is a chance that the squeeze on consumers will ease.
That will not, of course, suddenly transform the growth outlook in Britain, or for that matter in America. Christine Lagarde, the new managing director of the International Monetary Fund, says countries should examine “all possible measures” for boosting growth in the short-term, while maintainng credible medium-term plans for cutting their budget deficits.
There are not, however, many options for doing this, and Britain and America, with their big deficits, are not obvious candidates. Supply-side reforms will help but take time. More lending into the economy would help too and the banks’ poor record on lending to small firms so far somehow got left out of their lobbying for delay or abandonment of the Independent Commission on Banking’s reform proposals.
The truth is we have had a recovery that flattered to deceive. Last year, according to the IMF, the world economy grew 5.1%, one of only three years in the past 30 when growth has exceeded 5%. That growth was driven by emerging economies but included 3% growth in advanced economies. America grew 3%. Britain’s first 12 months of recovery were stronger than after previous recessions.
That growth could not be sustained, either globally or more particularly in the advanced economies. Gerard Lyons, chief economist at Standard Chartered, predicts that emerging economies will grow faster next year than this, as the effects of measures taken to combat inflation wear off.
Advanced economies, however, face a “long hard slog”. Standard Chartered has not revised its forecasts for America, the eurozone and Britain much, because they were low anyway. My guess is that the weakness of consumer confidence is more a reflection of the tough road ahead than anything more sinister.
What does this mean for the Bank of England’s monetary policy committee (MPC), which meets this week? There was a time when the Institute of Economic Affairs’s shadow MPC was a good predictor of decisions by the actual MPC.
I doubt if that is the case this time. The shadow MPC, which remains concerned about the loss of Bank credibility from persistent above-target inflation, votes 5-4 for a half-point hike in interest rates, though the committee also says the Bank should stand ready for more quantitative easing if the eurozone situation gets out of hand.
A rate rise will not be on the cards when the MPC meets. An expansion of the existing £200 billion of asset purchases (quantitative easing) will be. It looks a bit early to do it and, as I have said before, I do not think it would be a good idea.
Consumers are gloomy, after allowing for temporary factors, because reality is setting in. The twin hangovers – banking and fiscal – are painful but they have to be endured. This is no time for the hair of the dog but for a necessary hairshirt. An artificial monetary stimulus, like an artificial fiscal stimulus, would not solve anything. Deep down, people understand that.
My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.
This post originally appeared at David Smith’s EconomicsUK and is reproduced here with permission.