Understanding Consumer Confidence and Spending in the Economy

Consumer confidence and spending are really important when we look at how the economy works. They help us understand economic cycles, which show how the economy grows or shrinks over time. When we talk about consumer confidence, we mean how people feel about their money and the economy as a whole. When people feel good about their finances, they tend to spend more. This spending is a big part of what keeps the economy healthy.

How Consumer Confidence Affects Economic Cycles

1. Measuring Consumer Confidence:

   • There are tools to measure how confident people feel, like the Consumer Confidence Index (CCI) and the University of Michigan Consumer Sentiment Index. For example, in July 2023, the CCI was 109.7. This number shows that people felt positive about the economy. If the number is below 100, it usually means people aren't feeling so great.

2. Consumer Spending:

   • In the UK, consumer spending makes up about 67% of the country’s GDP, which means it’s super important for economic growth. When people feel confident, they spend more money. This encourages businesses to invest and hire more workers, helping the economy grow.
   • For instance, after more people felt confident following the pandemic, the UK saw a 6.4% rise in retail sales in 2021 compared to the year before. This boost helped the economy recover.

The Phases of the Business Cycle

The business cycle has four main phases: expansion, peak, contraction, and trough. Consumer confidence and spending are key players in all these phases:

• Expansion Phase: This is when consumer confidence and spending go up. This often leads to new jobs, more business investments, and overall economic growth. For example, from 2009 to 2019, the UK economy grew a lot. People felt more confident, and the CCI rose from 87.2 to over 100.

• Peak Phase: Here, confidence may level off as people stop spending as much. Inflation can start to become a problem, leading to stricter policies. At the end of 2019, consumer confidence began to slip as people worried about things like Brexit.

• Contraction Phase: When the economy is doing poorly, consumer confidence drops quickly, and people spend less. The Bank of England noted that during the COVID-19 pandemic, consumer confidence fell drastically, with the CCI dropping to around 45. Spending also fell by over 30% in April 2020 compared to a year earlier.

• Trough Phase: This is the lowest point of economic activity when consumer feelings are very negative. Recovery starts when confidence levels stabilize and begin to rise. In 2021, the CCI began to go up, signaling the start of recovery as the economy reopened and new stimulus measures were put in place.

Conclusion

In short, consumer confidence and spending greatly affect the economy. When people are confident, they spend more, which helps the economy grow. But low confidence leads to less spending and economic struggles. Knowing how these factors work together is important for leaders who want to keep the economy stable and help it grow over time. By using smart policies, they can respond to downturns and help the economy bounce back.