The Impact of Falling Economic Confidence Levels

A few months ago, 2016 was being viewed as the year when the global economy finally broke out of its recent slump and returned to higher levels of growth in terms of economic output, foreign trade and investment.  After four consecutive years in which global economic growth had hovered around 3%, there were hopes that global economic growth could approach 4% this year.  However, the first eight weeks of 2016 have brought a wave of bad news for the global economy, with the recoveries in the world’s developed economies sputtering and with many of the world’s leading emerging markets in the midst of major downturns.  As a result, investor, business and consumer confidence levels have plunged in recent weeks and this loss of confidence is threatening to usher in a severe economic slowdown in the months ahead.

This loss of confidence in the outlook for the global economy is most evident among investors, as they have seen the value of many of their investments fall significantly in recent weeks.  Most notably, share prices around the world have continued to fall in the wake of their volatility in 2015 and are now well below their peak levels in most of the world’s leading stock markets.  Meanwhile, natural resource prices have continued to decline as a result of disappointing demand levels in China and other key markets and this has had a massive impact on dozens of countries around the world.  On currency markets, the US dollar and other safe haven currencies continue to appreciate against more volatile currencies, particularly those belonging to slowing emerging markets, leading to greater levels of economic instability around the world.  Altogether, huge amounts of wealth have been wiped out by this rising level of investor uncertainty and without some better economic news in the weeks and months ahead, this trend will continue.

Businesses have also seen their confidence levels fall in recent months, as the outlook for their key markets around the world has been disappointing.  Not long ago, business confidence levels had been at their highest point in recent years, buoyed by the hopes that the developed world’s economic recovery would gain steam in the coming years.  However, falling share prices and a worsening outlook for key markets such as the United States, Europe and China have severely damaged business confidence levels so far this year.  Moreover, businesses had been counting on emerging markets such as China, Brazil and Russia for a good portion of their growth in the coming years, but these economies have all recorded disappointing growth levels in recent months and will struggle to generate higher levels of growth in the years ahead.  Due to these uncertainties, businesses are increasingly beginning to cut bank on spending levels and this is having a major impact on many economies around the world, adding to the downwards pressure on investor confidence as well. 

Of all of the sectors of the global economy, it was the consumer sector that was expected to be the engine of the economic recovery in 2016.  So far, consumer spending in key economies such as the United States and China has been robust, although not enough to prevent a slowdown in either country in recent months.  Likewise, consumer spending in other major economies has also been relatively strong in recent months, but there too, growth levels have been dragged down by other sectors of their economies.  As investor and business confidence levels have fallen in recent months, there are now fears that consumer confidence levels will also begin to decline, removing the last key driver of economic growth that is still in place.  Already, there are signs that consumer confidence levels are waning and some consumers are now holding back on spending due to this change.  Should consumer confidence levels fall significantly in the months ahead, then the outlook for the remainder of 2016 will fall dramatically and global economic growth levels could decline sharply.  Therefore, it is imperative that governments do all that they can to prevent a decline in consumer confidence levels in order to allow for the global economic recovery to regain momentum.