Microeconomic Decision-makers - Households: Confidence

Objective: Influence on households' spending, saving and borrowing: confidence

Confidence is a psychological state that reflects households' expectations about the future economic conditions. It significantly influences their decisions regarding spending, saving, and borrowing. High confidence typically leads to increased spending and borrowing, while low confidence often results in reduced spending and increased saving.

What is Confidence?

Confidence is not based on objective economic data alone but also on sentiment, news, and personal experiences. It can be affected by various factors, including:

• Economic growth and employment levels
• Inflation rates
• Government policies
• Global economic events
• Political stability

How Confidence Influences Spending

When households are confident about the future, they are more likely to spend money on goods and services. This is because they expect to have stable incomes and feel secure about their financial situation. Increased consumer spending is a major driver of economic growth.

Conversely, low confidence can lead to reduced discretionary spending. Households may postpone major purchases or cut back on non-essential items due to uncertainty about their future financial prospects.

How Confidence Influences Saving

Confidence has an inverse relationship with saving. When households are confident, they may be less inclined to save a large portion of their income, as they feel less need for a financial buffer. They might prefer to spend their money now.

However, during periods of low confidence, households often increase their saving as a precautionary measure. They want to have funds available to cope with potential job losses or unexpected expenses.

How Confidence Influences Borrowing

Household borrowing is also strongly influenced by confidence. When households are optimistic about the economy, they are more likely to take out loans for things like mortgages, car purchases, or other investments. They feel confident in their ability to repay these loans.

In times of low confidence, households are generally more cautious about borrowing. They may delay large purchases or avoid taking on new debt due to concerns about their future income and ability to repay.

Factor	Influence on Spending	Influence on Saving	Influence on Borrowing
High Confidence	Increased	Decreased	Increased
Low Confidence	Decreased	Increased	Decreased

Examples of Factors Affecting Confidence

1. Employment Levels: High employment generally boosts confidence, while high unemployment reduces it.
2. Inflation: Unexpectedly high inflation can erode confidence as it reduces purchasing power.
3. Government Policies: Fiscal and monetary policies perceived as effective can increase confidence.
4. News and Media: Positive economic news and optimistic media coverage can improve confidence.

It's important to note that confidence is a complex and often volatile factor. It can change rapidly in response to new information or events, leading to significant shifts in household spending, saving, and borrowing patterns.