Consumer confidence is sharply up
Despite the lagging quality of disposable income, Europe releases its consumer confidence indicator fairly regularly, on a monthly basis toward the end of each month. The August number is already out and the September figure is to be released on September 20 for the Eurozone and September 29 for the United Kingdom. Over the past few months, consumer confidence has risen sharply for European countries, with the United Kingdom seeing an increase from -27 in April to -13 in August, and the Eurozone rising from -22.2 to -15.6 over the same period.
The Eurozone consumer confidence indicator is based on the arithmetic average of the balances of four questions: the financial situation of households, the general economic situation, unemployment expectations (with an inverted sign), and savings over the next 12 months. The UK indicator is based on similar questions. But it asks how the current household financial situation and the United Kingdom’s general economic condition compare to 12 months ago and what’s expected over the next 12 months, plus whether there are any benefits for people to make major purchases like furniture, washing machines, or TVs.
Each available answer box is given a number, which combines with other respondents’ answers to arrive at an index. The higher the index, the more confident respondents are about the current and the future economic outlook. With the total collapse of the euro averted through the European Central Bank’s support, the government warming up to delaying austerity measures, and economic growth stabilizing, consumer confidence should continue to rise. As long as the consumer confidence indicator remains in an uptrend, it should be positive for restaurant sales and companies such as McDonald’s Corp. (MCD) and Yum! Brands Inc. (YUM).
Varying interpretation of the two indicators
It’s interesting to note that although the two indicators try to capture consumer confidence, they’re subject to human biases. While the Eurozone index only asks respondents to look at what they expect over the next 12 months, the UK index also asks individuals about the current state compared to 12 months ago and whether there are benefits to making major purchases. Now, I don’t know for sure why the GfK National Opinion Polls ask whether individuals will make purchases, but what I do know is that when a survey is composed of questions along the lines of “How was the past?” and “How is the future is going to be?” there’s a possibility of respondents anchoring their answers.
Suppose an individual sees positive improvements in the economy over the last 12 months and expects them to continue over the next 12 months—though not as much. Then the respondent might not say the next 12 months will develop very favorably. When economic growth was still in motion throughout the early 2000s, the United Kingdom’s consumer confidence was just bouncing up and down, while that of the Eurozone rose overall. So it may be wise to treat the UK consumer confidence index with care.