Tuesday, 14 February 2012

Business and consumer confidence

Business cycle tracking series

Continuing with the business cycle tracking analysis, I will take a brief look at the business and consumer confidence indicators for selected countries. I will observe the OECD indicators of business and consumer confidence to verify their total effect on predicting the recovery.

First up is business confidence.
Source of data: OECD Main economic indicators database

As can be seen on the graphs, business confidence was severely struck during the last adverse shock, even though the data seem to show the deterioration of business confidence started earlier last year, which is probably due to uncertain expectations on the development of the recovery. Even though policy uncertainty culminated in August 2011 with the debt ceiling argument in the US Congress and the eurozone situation, business confidence simply followed down that same trend in Europe, while recovering in the US following a shift of the debate toward electoral topics and positive signs from the economy. 

In Europe, German business confidence, even though experiencing a rapid rise ever since the official end of the crisis in 2009, reacted with caution to the recent eurozone development which resulted in a slightly poorer economic performance of Germany in the final quarter of 2011.

Regarding peripheral eurozone, it seems that the bond purchases of the ECB in the summer didn't do much good for Italian or Spanish business owners. It was a temporary relaxation for their governments at the time to take care of their debt burden. Obviously, the businesses weren't fooled as their anticipations of an uncertain future grew and their confidence deteriorated.

Once the data for the first quarter of 2012 is available I expect to see an improvement of the business confidence indicator, as the businesses are more likely to positively react to reforms enacted by the Italian and Spanish governments, than to a temporary liquidity offering of the ECB to the governments to ease their debt burden. 

The second indicator is the consumer confidence indicator (CCI), which is signaling more ambigous performance and a much stronger reaction. The consumers are obviously reluctant to spend.

Source of data: OECD Main economic indicators database
Unlike business confidence, except for Germany and Spain, every other country experienced a decrease (or stagnation) of consumer confidence since 2009. The US, after having stagnating low confidence levels throughout the last two and a half years, reached a bottom point in August 2011 and has experienced an increase ever since, as policy uncertainty started falling. The UK and the eurozone are still in a free-fall as ambiguous policy solutions from their policymakers reflect the economic environment. The UK is still hoping for better news in 2012 with the Olympics and the Diamond Jubilee, which might result in a rapid increase of both consumer and business confidence, and consequently a higher aggregate level of spending.

In peripheral eurozone, again observe the reaction in consumer confidence after the first set of Italian and Spanish bond buying from the ECB in the summer. Consumers obviously didn't see the same effect the bond markets did. Even though this decreased the yields substantially at the time, consumers failed to see how this could be helpful for them. This might shine new light on the effectiveness of monetary actions from the ECB to help start growth. In my option, it can do no such thing. Its end result is a temporary easing for the governments in support of the reforms. It will yield a positive effect for growth only if the reforms are done effectively and efficiently.  


  1. That's an interesting point that ECB ultimately didn't help business or consumer confidence. However, think of it from a different perspective; they did help improve investor confidence which will surely eventually make the businesses and the consumers better off.
    If banks start feeling safe again they will push the excess liquidity back into the system. And it is just this sort of policy from the ECB that can trigger that outcome..

    1. I agree, they do provide some sort of investor confidence, but I also feel that if any pro-growth solution is to arrive, it won’t come from the ECB, it will come from pro-growth reforms enacted by the stricken governments. Market liberalization, removing regulation and reducing the tax burden is more likely to restore consumer confidence than anything the ECB is prepared to do.

      On another note, here's an interesting text from a few months ago on why the ECB shouldn't just print more money, undermining the argument on the increase of investor confidence, at least in the long run.

    2. All these reforms are certainly important, but my argument is that it's easier to do them if you have support from the central bank with temporary easy money.
      I agree with the text you've sent here, the ECB shouldn't just print, but they should provide temporary relaxing to ease the burden off the reforming governments. It might not help consumers or businesses directly, but it might do it indirectly..