In economic banter, recovery is a word that has been ahead of its time for over a year. It was dusted off following the global plunge in output last year, and has been well-used since.
In economic banter, recovery is a word that has been ahead of its time for over a year. It was dusted off following the global plunge in output last year, and has been well-used since. But the debate on the timing of a convincing global recovery remains open. What do large-economy consumers think?
Their view is important. After all, they account for a substantial portion of world GDP. In most developed nations, consumers are 60 per cent of the economy; in the U.S., it’s over 70 per cent. It follows that about 32 cents of every dollar that circulates globally is directly tied to these big spenders. As such, it is difficult to imagine a fulsome world recovery that does not have this slice of the economy fully on side.
Are they there yet? Measures of consumer sentiment are perhaps the first clue. They are not generally known for their predictive ability, but they do give a good concurrent snapshot of consumer activity, and they are usually released well ahead of other key data sources. Most large economies create their own indexes, giving us a good idea of consumers’ perceptions – and the news isn’t great.
At first blush, confidence indicators actually look strong. In all regions, they have risen aggressively against the lows experienced in late 2008 and early 2009. But most have flattened out, or even retreated slightly from levels that are well below pre-recession averages. A key US index remains 20 per cent below peak levels in spite of a strong rebound; the other major U.S. index is hovering 50 per cent below peak. Consumer confidence staged a remarkable rebound in Germany, but one that has left its index just above previous cyclical troughs. The index for the EU as a whole is similar.
Sentiment in France raised eyebrows, as its recovery was more sustained. However, it has recently faltered, and is currently well below the pre-recession average. On balance, Japanese confidence has regained much of its lost ground. However, owing to its protracted economic slowdown, Japan’s consumers were hardly ecstatic just prior to the downturn. In sum, the abject pessimism brought on by financial and economic duress has faded, but consumers seem stuck in a decent-sized rut.
Do the doldrums make sense? When average large-economy consumers look out the window, they still see elevated unemployment rates and low current job-creation. They know they are still paying down huge debts. They still see significant market disturbances, like threats of sovereign default in less likely nations. The sort of activities that suggest that the large economies continue to work off significant pre-recession excesses – something that we believe will persist through 2010.
Canadian consumers have fared better. Confidence rose to within a whisker of the pre-recession average in January, and has slid only marginally since then, reflecting the relatively strong retail and housing activity that Canada has experienced of late. Good news for overall domestic demand, but a fulsome recovery in Canada still depends critically on international trade – which in turn is relying on a much more compelling rebound in demand from our traditional well-heeled customers.
The bottom line? A significant segment of world spending power remains at worst, gloomy about current conditions, and at best, tentative about near-term prospects. Consumers appear to need stronger evidence that recovery is here. When they get it, indicators suggest growth will be robust.
