Microeconomic Decision-Makers - Households: Confidence

This section explores how consumer confidence influences household spending, saving, and borrowing decisions. Consumer confidence is a psychological indicator of the overall optimism consumers feel about the economy.

What is Consumer Confidence?

Consumer confidence reflects how people feel about their current and future financial situation, as well as the overall state of the economy. It's not a precise measure, but rather a survey-based index that gauges people's attitudes.

Key factors influencing consumer confidence include:

• Employment levels
• Inflation
• Interest rates
• Economic growth
• Government policies
• Political stability

How Confidence Influences Spending

When consumers are confident, they are more likely to spend money. This is because they feel secure about their income and future financial prospects.

Increased confidence leads to:

• Higher levels of discretionary spending (e.g., entertainment, holidays).
• Increased demand for durable goods (e.g., cars, appliances).
• Greater willingness to take risks with purchases.

Conversely, low confidence often leads to reduced spending as people prioritize saving and reducing debt.

How Confidence Influences Saving

The relationship between confidence and saving is less straightforward than with spending. However, generally:

• During times of high confidence, people may be less inclined to save as they feel secure in their financial position.
• During times of low confidence, people tend to increase their savings as a precautionary measure. They may save for unexpected expenses or future economic downturns.

Changes in interest rates also play a role. Low interest rates can disincentivize saving, while high interest rates can encourage it.

How Confidence Influences Borrowing

Consumer confidence significantly impacts borrowing decisions.

High confidence typically leads to:

• Increased demand for loans (e.g., mortgages, personal loans).
• Greater willingness to take on debt for purchases.
• Lower borrowing costs as lenders are more confident in borrowers' ability to repay.

Low confidence, however, often results in:

• Reduced demand for loans.
• Increased caution about taking on debt.
• Higher borrowing costs as lenders perceive greater risk.

Table: Confidence and Economic Decisions

Confidence Level	Spending	Saving	Borrowing
High	Increases	Decreases	Increases
Low	Decreases	Increases	Decreases

Note: This table represents general trends and may not apply in all situations. Other factors also influence these decisions.

Example

During the COVID-19 pandemic, widespread uncertainty and economic lockdowns led to a sharp decline in consumer confidence. This resulted in a significant decrease in spending, an increase in saving, and a reduction in borrowing as households prioritized financial security.