Sentiment, Confidence, and Oil

Over the month of May we highlighted various economic indicators largely based around business sentiment data. The evolving pattern in this sector has been one where sentiment has pulled back from very high levels. We have also stressed that while the pull-backs have produced negative headlines, business sentiment remains robust with recent softening being normal.

This week we look at economic prospects from the consumers’ perspective, to see how confident they are about the future. Consumer confidence indicators are produced by different agencies in different countries but they all track sentiment across a random sample of households using a similar methodology. The indicators are gauging whether consumption through consumer spending is likely to increase, savings decrease and economic growth advance based on levels of confidence.

In the charts below, we depict the global picture emanating from consumer confidence surveys.

Consumer Confidence Indices

Source: GFK, University of Michigan, European Commission, Economic and Social Research Institute Japan, National Bureau of Statistics of China, 31 May 2018. Vertical axes represent respective index values applicable to each country.

It is evident from the surveys that consumers in the US, Europe and China are growing in confidence. Global economic growth has staged a strong recovery since the 2008 financial crisis and this is feeding positively into consumer expectations. Technological advancements and better global infrastructure have benefited consumers but these aspects have evolved in different ways globally.

The picture shown above for Japan and UK is different. Japan’s ageing population, through low birth rates and high life expectancy, is creating challenges. As a general observation, ageing populations tend to consume less.

UK consumers have been dealing with a squeeze in real disposable incomes, with inflation growing faster than average earnings. However, the negative trend in real disposable income (after taking inflation into consideration) has started to recede. Experience tells us that when wealth effects improve, consumer confidence follows suit. Of course, there are other variables influencing household incomes, such as rising oil and petrol prices. They act like a tax on consumers.

The oil price chart below shows how much of an impact oil prices have on inflation rates for the US and UK. When it fell sharply to reach a 13-year low in 2016, inflation also fell. However, its recovery has also contributed to higher inflation.

US & UK Inflation v Oil Price

Source: Bloomberg, 31 May 2018