Consumers sweat out sultry summer, but what about turbulent autumn?
Pessimism in the world economy is increasing rapidly. Nobody still believes in the lasting benefits of sporadic good news, such as the new armistice in the American-Chinese trade war. This has translated into a lasting deterioration in producer confidence, especially in industry. Consumers, on the other hand, continued to look to the future positively for longer, thanks to strong job creation and wage increases. This made the consumer the stronghold of the economy, despite being at a critical juncture for many risk factors. This does not mean that consumers are naive or blind - there are good reasons to remain optimistic for the time being. However, as the risks take their economic toll, we see consumers gradually throwing in the towel and realising that the golden years are over.
Consumer on top, industry down low
The cooling of producer confidence is most pronounced in the industrial sector. After all, industrial activities are the most dependent on international trade and investments, which are both under threat due to increasing protectionism. Confidence has come under pressure, particularly in the most industrialised large countries, but also in small economies that are highly interwoven in international value chains. The decline in industrial confidence has been followed by a slowdown or even a contraction in industrial production. Normally, declines in confidence indicators for businesses and consumers go hand in hand. Industrial cooling leads to job losses and wage moderation, both of which negatively affect consumers. For a long time, this was not the case in many countries, as consumer confidence held up better. A first explanation for this is the strong sentiment among businesses in service activities as they are less directly affected by international protectionism. A second explanation is the expectation in industry that many of the current problems are of a temporary nature. For example, companies keep people on their payrolls in order to be able to resume their long-term planning after a shock such as Brexit or the trade war. Third, many industrial sectors are subject to structural transitions such as digitisation. These require resources and people and result in permanently strong investment growth and job creation.
Blinded or forward-looking?
The question is how long these positive factors will last. Services are often highly integrated with product markets. An effective weakening in industrial production and exports will also affect many services. The estimation that many problems are temporary may also be too optimistic. Protectionism is not a one-day wonder, but a structural change in the world economy (see KBC Economic Opinion of 19 June 2019). Finally, the willingness to invest in a long-term transition will decrease if profitability comes under pressure. In Germany, consumers now seem to be aware of what is going on: after a rapid deterioration in industrial sentiment, the German consumer is now also gloomy (see figure 1). We also expect a clear cooling of the British economy in the near future, as British consumers are finally beginning to worry about Brexit. While consumers are currently part of the solution, as consumption growth keeps economic growth going, they will be part of the problem. Falling consumption undermines growth prospects.
Figure 1 - German consumer loses confidence (left axis: index, above 50 = expansion; right axis: index)
Stay of execution
So, it looks like we're going through a stay of execution right now. The current (partial) desynchronisation of producer and consumer confidence is keeping the global economy afloat. How can consumer confidence be maintained or restored? Ultimately only by removing the uncertainties. In this respect, a turbulent autumn is coming. The current Brexit deadline of 31 October 2019, for one, will put the spotlight on Brexit. A severe economic shock to the European economy cannot be ruled out. Furthermore, now that President Trump has his hands free after the armistice with China, he may be aiming his arrows at Europe this autumn. And finally, the discussions about the Italian budget will undoubtedly flare up again in the new European Commission.
Perhaps we could also look at it in a positive light. Once consumers catch on, they will become less accepting of foolish political games and pointless economic policies. The consumer voter will be able to make his voice and, above all, his displeasure heard, thus contributing once again to a solution. In any case, there is still a long way to go. So, enjoy the sultry summer and save up energy to tackle the problems of the turbulent autumn.