The indicators show a rise in . . . wishful thinking

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The Independent Online
THE Prime Minister and the Chancellor of the Exchequer are convinced they know what is preventing recovery: lack of confidence by consumers and business leaders. As soon as confidence returns, shops will become busier and industrialists will invest more; the recession will be over. That is why the Treasury now pays so much attention to the two main indicators of economic confidence - Gallup's monthly surveys of consumers and the CBI's quarterly surveys of business.

Ministers' understandable quest for early signs of green shoots has led them astray. Three times in the past 18 months both indicators suddenly turned positive: in March/April and September/October last year, then March/April this year. Each time, the news received wide publicity, not least from enthusiastic ministers. Each has proved to be a false dawn. After years of being reliable lead indicators, the surveys appear to have lost their predictive power. Why?

Two separate aspects need to be disentangled: short-term and medium-term. In retrospect, the false dawns related to politics more than economics. Confidence picked up in the wake of the Gulf war, after the failed coup in the Soviet Union, and at the time of the general election.

What seems to have happened is that consumers and managers responded to the general atmosphere of good news, and hoped that some of it would rub off on their own lives. The link may even have been subconscious. And, in a small way, this mood briefly showed itself in actual transactions: there was a brief flurry of activity in the housing market in the spring of 1991, and shops did slightly brisker business just after the Tories won their fourth victory. But these upturns were too weak to reinforce the psychology of recovery, and it was not long before shops and estate agents started losing business again.

The key thing about these blips was that they lacked any economic impulse. The next time Gallup or the CBI produces more optimistic results, our first reaction should be to ask whether the figures reflect a lasting change in economic conditions, or merely the brief afterglow of good political news.

Making sense of short-term changes is essentially a matter of common sense; medium-term trends are another matter. James Capel, the stockbrokers, recently analysed the relationship over the past 10 years between retail sales and Gallup's consumer confidence figures. It concludes that the underlying improvement in confidence last year should have been enough - blips aside - to pave the way for higher spending this spring. Even after a sharp downturn in the latest Gallup survey, its confidence ratings are still significantly higher than they were two years ago (the same is true of the CBI's data). Yet the news from the high streets remains grim. James Capel reports this divergence between confidence and reality under the brutal heading: 'Poor pollsters - wrong again'.

That is unfair. There is no suggestion that Gallup's surveys are technically inept. However, something is going on in the undergrowth. I believe that three factors are at work. First, as Capel's study points out, Gallup's data makes no allowance for differences in wealth between different groups of respondents. Compared with 10 years ago, the present recession is relatively far more serious for higher earners and for wealthier regions, such as the South-east.

Suppose one pessimistic Gallup respondent on pounds 30,000 a year spends pounds 60 a week less than before, while four optimists on pounds 10,000 a year each spend pounds 10 a week extra. Gallup's computer will find a positive score of plus three among that group (four optimists minus one pessimist), yet their net impact on the economy is to depress spending by pounds 20 a week.

Second, the length of the recession is subtly changing the meaning of the answers Gallup tabulates. Suppose you have just received a pay rise and a new company car, and a Gallup interviewer asks you what you expect to happen to the financial position of your household over the next year. If you say 'get better', you are signalling great optimism; the chances are that you are in a mood to spend. But suppose you have just lost your job. 'Get better' might simply reflect a belief that today's horrors cannot last for ever. Meanwhile, spending will be cut to the bone. The longer the recession continues, the less it can be assumed that 'get better' means what it did in the late Eighties.

Third, the line between confidence and hope is too thin for comfort. Some people who say they are confident about their prospects for the next 12 months may be expressing a hope that things will pick up, but any spending spree must wait for evidence that their hopes are being fulfilled. In the present atmosphere, such hopes are easily dashed.

This applies in spades to the housing market: many people may want to move house and buy new curtains, carpets, furniture and appliances; they may display optimism to pollsters; but until the housing market really does revive, their 'confidence' consists of little more than an


As with much of economic life, the confidence figures are traversing uncharted ground. My own guess is that consumers will follow rather than lead the start of recovery; in other words, the recession will not end because of a spontaneous decision by millions of shoppers to spend more, but when something else happens to boost the wider economy. The current data from both Gallup and the CBI bears out the fragile nature of consumer and business sentiment: both reflect the gloom from the latest real-world data from shops and factories. As long as Norman Lamont just sits tight and waits for consumers to rescue his strategy, I fear that the economy will stay gridlocked in recession.