- Vinay Nair
Consumer Confidence and its Impact on Economy
Consumer confidence is a degree of optimism that a buyer feels about the overall state of the economy and their personal finance situation.
Which literally means,
If the consumer has confidence in the economy the buyer will tend to spend more than his savings.
In contrast, when consumer confidence in economy is low, buyers will intend to save more.
It can be easily be understood from this reaction of buyers that consumer confidence is directly proportional to the state of economic expansion or contraction.
Consumer Confidence in India averaged 101.03 points from 2010 until 2020, reaching an all time high of 116.70 points in the fourth quarter of 2010 and a record low of 63.70 points in the second quarter of 2020.
Globally, deteriorating job prospects and rising uncertainties about personal finance were the driving forces behind a record drop in consumer confidence around the second quarter of 2020. A survey found that overall global consumer confidence fell to 92 in the second quarter from a near-historic high of 106 early in the first quarter. Consumer confidence readings below 100 are considered negative, indicating that consumers were more pessimistic.
The current decline in consumer confidence is twice as deep as compared to the drop during the 2008-09 global financial crisis.
The pandemic has taken a heavier toll on jobs than anticipated.
The world lost a total of $3.5 trillion in wages due to the pandemic as reported by the International Labour Organisation (ILO) in a new study.
That is equal to 5.5 percent of the overall global gross domestic product.
Raison d'être for consumer behavior
As the economic crisis evolves into a demand-driven recession, consumers are expected to remain pessimistic in most economies around the world.
In emerging markets such as Argentina, Brazil and Russia, the continuous fall in job prospects and worries about personal finance drove down the consumer confidence in the second quarter. In developed economies such as North America and Europe the increasing unemployment and worsening job outlook spurred the decline in confidence levels.
In countries like Italy, Spain, UAE, India, Singapore and Mexico the pandemic induced domino effect – business closures and cuts in consumer spending lead to fading job prospects and anxieties relating to personal finance, which were much more substantial than in many other parts of the world leading to weakening of consumer confidence.
Consumers spent more on essential products and services, reflecting their new stay at home situation.
Restrictions on travel, visits to malls, restaurants, etc. depressed discretionary spending on categories such as entertainment.
Consumer saving and investing in instruments such as stocks and bonds increased in the second quarter of the year.
Owing to the change in mindset brought in by the pandemic we can see a long term shift in consumer spending trends.
Government policies and measures to curb the virus domestically has also played a major role in the monumental drop in consumer confidence. While some countries have been able to beat the virus to some extent others are still struggling on the same front and the consumers in those economies have further deteriorating confidence in the economy.
Winning over Consumer Confidence
The holiday season is now just a few months away.
Consumer spending is likely to increase in the next few months, but will still be focused on essential items with marginal improvements in expenditure on non-essential items owing to the festival customs.
Giving Gifts is an essential part of the holidays and can see consumers spend some of their disposable income on the same. The argument to be made here is that with worries over personal finance even the holidays might not help in improving the consumer confidence numbers substantially. The increase in spending in the holidays cannot be mistaken for as a sign of growth or confidence in the economy. Spending in the festive season can be considered as an essential expenditure for some households, especially in countries like India where there is a lot of belief in the rituals and customs relating to festivals.
This is the first time that consumers are pessimistic since 2016. The attitude of consumers towards non-essential expenditure is expected to remain bleak for the coming year as well.
The threat of a second wave in many countries and the struggle to tackle the virus in others will continue to suppress global consumer confidence.
Job cuts have increased anxiety about reduced incomes and household financing stress. This has led to a weakened consumer demand. The current demand is also expected to wear down a little once government programs for unemployed workers wind down. Raising trust in government authorities will be key to increasing the likelihood that citizens will follow public health advice and begin to safely re-engage in their local economy, leading to a faster recovery in consumer confidence.
The recovery in consumer confidence will vary by region.
In already recovered markets like China and South Korea the consumer confidence levels are likely to rebound quickly.
Europe has had a fairly diverse policy response with different regions recovering at different rates.
While countries like America and India are still struggling with the first wave of the virus.
Consumer confidence levels are probably only to return to normal once the threat of the virus is completely over.
For now, consumption is limited & sponsored by coronavirus-induced fear
