What do war and inflation do to our confidence in the economy? Until recently, there was one well-known example of that combination: the early years of the twenty-first century. After the introduction of the euro and a new tax system, inflation rose to over 4 percent in 2001, and everyone thought that was ridiculously high. That year the attacks in New York took place, followed by the American invasion of Afghanistan shortly afterwards, and the invasion of Iraq in 2003. Shortly after the latter event, Dutch consumer confidence fell to a value of -36. Only in the early 1980s, when draconian interest rate hikes had to squeeze the then high inflation out of the economy, that confidence was lower, according to the OECD, the club of rich industrial countries.
But the absolute depth record was recently set, in September and October last year: -59. One of the sub-questions to consumers from which Statistics Netherlands (CBS) compiles this figure is the ‘opinion of the economy in the past 12 months’. The score: -91. Never has there been such a consensus.
Questions about the economic climate account for 40 percent of consumer confidence. Questions about one’s own financial situation and the willingness to make large purchases for 60 percent. But because the answers about the economy are much more extreme, they still exert a significant influence on the outcome.
The fierce movement of confidence is understandable. The pandemic hit hard in 2020. And the combination of sky-high inflation – up from 15 percent last summer – and a war on their own continent in Ukraine is even worse. Both the war and very high inflation provide the next confidence shock.
Who is most concerned? Short answer: the older, the more concerned. Averaged over the last six years, consumer confidence declined as age increased. The fact that Statistics Netherlands concluded in another study this week that young people are actually more concerned about their own finances is not really reflected in the long-term consumer confidence survey.
Another straight line: the less educated, the lower the confidence. Working people have higher confidence than non-working people. This suggests a strong link between general consumer confidence and income. It is also remarkable that women have a structurally lower level of confidence than men. This phenomenon occurs everywhere, and almost everywhere in time. From Europe to the United States. You can unleash all kinds of gender-related theories on that. But perhaps there is also a link to income here, and the difference in confidence simply reflects the gender pay gap that still exists.
Consumer confidence plays a role in mapping expectations about the economy. Consumer confidence and actual spending broadly follow the same pattern – although the predictive value of confidence can sometimes be questioned. It often better indicates the ‘now’ than the ‘later’. It is precisely in recent years that the connection has been lost. For example, confidence fell from the summer of 2021, while spending – no longer constrained by lockdowns – exploded. Until the start of the war.
There was and is little that could be done about the breach between expectations and practice.
Anyway: trust is also largely psychology. Older people may be more cautious because of their life experience or because they have more to lose. People with a pension have little confidence on a structural basis, perhaps because they are no longer masters of their own destiny when it comes to income – as an eighty-year-old you can no longer take a part-time job.
And what about the difference in trust between countries? The EU keeps track of this uniformly and therefore easily comparable. The difference in confidence between different EU countries is huge. At the top of that ranking are the Scandinavian countries with high consumer confidence. This is followed by the Netherlands and Germany – and Poland. At the bottom are the southern European countries.
For Greece, with height in last place, this may be explained by economic conditions, which were very tough. High (youth) unemployment rates can also be a reason for the malheur for other Southern European countries.
Three other relationships are established in the following graph. There is a significant correlation with the country scores in the annual World Happiness Report, which is based on data from the international pollster Gallup. The happier, the more confidence. There is also a strong relationship with gross domestic product per capita (adjusted for purchasing power). The more wealth, the more confidence. But establishing a causal relationship is difficult, and moreover, happiness, prosperity and confidence are also very closely related: GDP per capita, for example, partly determines the score in the World Happiness Report.
As an example, here is also a factor that does not necessarily make sense. The strongest association found with consumer confidence is the latitude of a country’s capital. Cold, dark winter, little sun? Just trust! Maybe it says something, maybe not. But it warns anyway that “correlation” doesn’t necessarily mean “causation.”