Confidence…

I’m not talking here about standing up in the midst of a crowd of people to make a speech - rather about business confidence and consumer confidence. This is of particular interest to me and, over the past six months, I’ve been studying it.

Like everyone, I’ve heard the term a lot ever since the pandemic broke as confidence tumbled when the first lockdown was announced and then rose again as the COVID-19 vaccine roll out began.

Consequently, I believe that this is an ideal opportunity for us to pose this questions to ourselves: “What is confidence and why does it matter?”

In the first instance, let’s look at business confidence. A great example and one that is often referred to on the financial pages is the Purchasing Managers’ Index (PMI). So, what is it? And how does it work?

The PMI is a measure of business confidence, showing whether business anticipates the economy and prevailing business environments to be favourable or unfavourable.

The PMI is based on a monthly survey sent to senior executives across a broad spread of industries and asks questions about new orders, inventory levels, production, deliveries and employment. The ‘headline’ number, the one you will often see quoted, can be anywhere between 0 and 100. In ‘normal times’ it hovers around 50, with any figure above indicating that business is confident about the future, whilst a figure below 50 suggests the opposite.

As an example of PMI in action, last April the PMI in the Eurozone crashed to 13.5 as the economic impact of the pandemic became apparent. The UK fared even worse, with the PMI falling to a record low of 12.3 within the services sector. One year later, with the vaccine rollout gathering pace, the PMI for the UK had risen to 61.0.

As illustrated in the above example, you may also see PMI figures quoted for different sectors of the economy, such as manufacturing and services.

Consumer confidence has a similar numerical value, although that is conveyed in plus or minus terms. In April, the Consumer Confidence Index rose to - 15, up from - 16 in March. Although negative, that was the highest figure since March of last year, with the Index having been as low as - 34 in May 2020.

Why is confidence important? When consumers feel confident, they are more likely to spend and more likely to borrow, both of which are a likely to boost the economy. A very simple example is home renovations: we are unlikely to spend the money on a new bathroom, which would be benefitting the bathroom supplier and the plumber, unless we feel confident about our future prospects and employment.

The search for confidence, or at least, stability, is almost certainly the reason so many people have left the hospitality sector during the last year - with many outlets now struggling to find staff to re-open - which I mentioned in a previous blog.

Similarly, when businesses feel confident, they will invest in both equipment and new members of staff.

Clearly any potential “third wave” of the virus would most certainly dent confidence again – and this is one of the reasons why the Government is so keen to avoid any further lockdowns. It needs to rebuild not just the economy, but our confidence in the economy.

Perhaps then we will start to spend the billions of pounds that we, as consumers, have saved over the past year.