Does ‘Optimism’ Really Matter?

Dafferns Wealth

If your glass is by nature half-empty, you didn’t need to look far for confirmatory information last month.

Energy bills were going up – and are set to rise even further in October. Inflation was up again – with grocery inflation hitting its highest level for 13 years, And, of course, the National Insurance rises introduced in April were starting to bite.

With the war in Ukraine looking set to continue through the year, it was no surprise, therefore, to see plenty of articles reporting that ‘optimism’ was at a new low.

‘Brits’ optimism tumbles to new depths,’ reported City AM. ‘Below financial crisis and Covid lockdown levels.’

According to the article, optimism in the UK had slumped to its lowest level ever. Researcher GfK started tracking ‘optimism’ in 1974 and in May it fell to minus 40 – down two points on the previous month and lower than at the height of the financial crisis in 2008, the high unemployment of the 70s and 80s and the depths of the Covid lockdowns.

Does this matter? After all, if you look at it objectively, living standards are better now than in the past and employment levels are significantly higher.

But looking at it objectively is one thing – consumer confidence is entirely another. And yes, it does matter.

In most countries, consumer spending makes up about two-thirds of all economic activity. So when the economy is expanding – and people feel confident about the future – they are prepared to spend money, especially on the traditional ‘big ticket’ items such as cars and household appliances. This spending drives more economic expansion, creating a virtuous circle.

At the moment, though, we have the opposite: consumers feel anything but optimistic about the future and are therefore less willing to spend. ‘Brits cut back on fridges and sofas’ as one of last month’s headlines had it. Reduced spending means businesses sell less, which in turn makes them less willing to invest and employ people – ultimately leading to a recession.

With inflation continuing to increase and everyone well aware that their energy costs will rise again in the autumn, there is going to be a continued reluctance to spend. Worryingly, the OECD recently forecast that the UK would have the lowest growth of all the G20 countries next year, with the exception of Russia. Unsurprisingly, their report called on the Chancellor to quickly implement tax cuts.

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