Wednesday 2nd May 2018
Confidence is a funny thing….
What is confidence?
Is it something real or something imagined? Is it something that can be quantified and measured? Or is it something we create in our minds or hearts and cling onto?
Stoke City manager Paul Lambert is ‘confident’ his team can win their last two remaining games and somehow avoid relegation from the Premier League. But what will his confidence amount to if or when his team drop into the Championship?
Is his confidence a sign that he truly believes? Or is it just something he feels he must say under the circumstances?
Is he trying to convince us or himself? His players or his employers? Is he just genuinely deluded?
Confidence is a funny thing. It either comes and goes, ebbs and flows – or is never actually there to begin with….
If confidence is something real, it might genuinely help us. It might genuinely inform us. If it isn’t, then it might severely misguide its unwitting dupes….
- A dangerous game….
I’ve been thinking about the nature and roots of confidence on the back of something I saw a little earlier this week….
Apparently, British consumers are feeling more confident right now than at any time since January 2017 – about their household finances, about job security and about broader business activity….
The headline confidence index published monthly by Yougov and the Centre for Economics and Business Research just hit 109.8 – 2.2 points up on the previous figure. For context, anything above 100 is considered ‘overall positive sentiment’.
Positive confidence data is generally considered a precursor to economic growth. Taken at face value, tha latest data tells us that British consumers see an economic upturn just around the corner….
But, confidence is a funny thing….
Where does it come from? What really drives it? And, if or when we believe we feel this thing, might we be misreading the signals or willfully kidding ourselves?
I don’t know? I simply pose the questions in a default state of ignorance….
The one thing I do know is that taking things purely at face value can be a dangerous game. And at Money Truths we wonder exactly where this new-found confidence amongst consumers spring from….
- Falling behind the pack….
It surely didn’t surface on any notions about the current strength of the British economy. Because the latest news doesn’t exactly set the pulse racing….
Apparently, according to the International Monetary Fund, Britain is falling further behind in the on-going race between competing economies….
If Britain were a racehorse, you’d be screwing your betting slip into a ball and preparing to chuck it into the waste-paper basket….
Whilst the global economy is currently motoring on 4-cylinders and enjoying what the IMF calls ‘broad-based momentum’, two-stroke Britain is an exception to the general rule….
Growth prospects for the US, German and French economies have been upgraded over the next two years. The US economy is forecast to grow 2.9% this year and 2.7% in 2019. The Eurozone is expected to grow 2.4% this year.
Britain, on the other hand, is expected to grow 1.6% this year and 1.5% next year. To put that figure into perspective, 2% growth would be considered the norm. So, to cut a long story short, Britain is not only lagging but losing additional ground all the time….
So much so, Britain is now considered a second-tier G7 nation by the IMF – putting us alongside Japan and Italy rather than the Americans, the French and the Germans. The rust spots are beginning to show on the paintwork….
Of course, we’re only talking forecasts and speculation and best guesses with these IMF figures. But, even so, I don’t retain any great feelings of confidence. How about you?
- Dangerously ill-equipped….
And the new-found consumer confidence surely didn’t arise on the back of the International Monetary Fund’s comments on the levels of debt prevailing worldwide….
The IMF reckon that global debt is now worse than it was before the last financial crisis….
A full decade of low global interest rates and widespread monetary stimulus – in the form of money-printing or ‘quantitative easing’ – has created a build-up of global debt which is the equivalent of 225% of world GDP….
That’s debt 12% bigger than was the case back in 2009….
The bigwigs who crunch the numbers and pull the levers at IMF headquarters are concerned that this such high levels of debt leave national governments and central banks tapped out and with little or no wiggle room to stimulate economies in the event of a global downturn. They say this….
‘Experience shows that a weak fiscal position increases the depth and duration of recession….’
In other words, a global downturn in the current fiscal climate would likely prove both painful and protracted….
Apparently, decisive action is required. Action that ‘should’ involve a retreat from ‘unnecessary’ stimulus, a cut-back on spending and an end to the extension of cheap credit….
The Institute of Public Policy also weighed-in last week saying that the Bank of England is dangerously ill-quipped to deal with the effects if the UK goes into another recession.
It says the Bank is set for a ‘car crash’ and that interest rates – too low for too long – should be closer to 5% than the current 0.5%.
- Carney’s conundrum….
We wonder when Britain plans to take the decisive action suggested by the IMF and the IPP….
Bank of England chief, Mark Carney, had been expected to move in that direction with another interest rate rise at the next meeting of the Monetary Policy Committee on May 10th. But he signaled last week that it probably won’t happen….
‘We have had some mixed data. On the softer side, some of the business surveys have come off. Retail sales have been a bit softer. We are all aware of the squeeze that is going on in the high street.’
The latest GDP figures – published after those remarks – probably put the mockers on any lingering hopes long-suffering savers might have had that interest rates would be heading up.
According to the Office of National Statistics, GDP grew by an almost invisible 0.1% during the first quarter of 2018 – down from the 0.4% of the previous quarter and well short of hopes and expectations….
Given that almost comatose growth rate, Carney’s hands are tied. An increase in interest rates now would probably tip the economy into the full-blown recession he is desperate to avoid….
It’s quite the conundrum Mr. Carney faces. June 2019 – the appointed time for Mr. Carney’s departure from the Bank of England – probably can’t come soon enough for him….
- Enjoy it while it lasts….
Which brings us back to our original question. Why do British consumers feel so confident right now?
Might it have something to do with the fact that inflation dropped to 2.5% in March from 2.7% in February – easing the squeeze on household finances?
Or the fact that wages rose faster than inflation for the first time in a year in the 3-months to February?
We don’t know. We are only guessing. And we applaud the sensitivity of householders and consumers whose moods pick up on these arcane fluctuations. Myself? I hadn’t noticed much difference.
But perhaps this tells us a little something about how consumer confidence works….
Maybe consumers don’t have any idea whatsoever about how to feel about the wider economy….
Maybe the truth is that your average consumer knows as much about the wider economy and its immediate or long-term prospects as I know about the composition of the bedrock at the bottom of the Atlantic Ocean. In other words, not very much at all.
Perhaps it is simply the case that consumers feel just a little bit better and a bit more confident about life in general when they have a bit more money in their back pockets. And that’s something we can all relate to and understand.
My advice to consumers is to enjoy the feeling of confidence while it lasts. It might not last long. The price of oil is going up. The Saudis would like it to rise higher still.
Almost every aspect of commercial activity depends directly on or is tied indirectly to oil. When the price of oil rises, the price of everything else rises too.
Inflation isn’t dead yet – only taking a nap….
That’s how it looks from here….
All the best,