By Jakov Milatovic and Peter Sanfey
Monthly data from the European Commission on consumer confidence show a significant pick-up in many European Union countries over the past year. However, the picture for EBRD countries of operations (CoOs) in the EU is more mixed.
Our analysis of the latest data shows that:
- consumer confidence is below the EU average in all EU CoOs;
- historically, confidence tends to be low in CoOs and exhibits higher volatility, especially in south-eastern European (SEE) countries;
- over the past year, confidence has improved in central Europe as well as (from a very low base) in Cyprus, but it is stagnant in SEE.
These results matter because confidence and GDP growth are significantly correlated and causation may run partly from the former to the latter.
Economists have long recognised the importance of confidence, or “animal spirits”, as a key determinant of decisions about spending and investment, and hence economic growth.
In many countries, considerable resources have been put into gathering survey data on consumer and business views about their spending and investment plans for the coming months and their assessments of the short-term economic outlook. These data are keenly tracked by economists and policy-makers, as they reveal important information that can be exploited for policy and forecasting purposes.
For many years, the EC’s Directorate-General for Economic and Financial Affairs (DG ECFIN) has tracked consumer and business confidence on a monthly basis in all EU member countries according to a standardised methodology.
The data on consumer confidence are derived from a survey that contains questions on the financial situation of households, their opinions about the general economic situation and short-term outlook in the country, their expectations for consumer price movements and unemployment, and their spending and saving plans.
Based on these answers, DG ECFIN constructs a seasonally-adjusted index that weighs positive versus negative answers. The index ranges from -100 to 100, with a negative (positive) score indicating a pessimistic (optimistic) view on average about likely economic developments in the short term.
Figure 1 shows that the latest level of consumer confidence in all 11 EBRD EU countries of operations is below the EU average. Among these 11 countries, the highest levels of confidence are found in the Baltic states, with Estonia almost at the EU average and Latvia and Lithuania not far behind.
They are followed by the central European countries: the Slovak Republic, Poland and Hungary, with Slovenia lagging behind in this group. Confidence is significantly weaker in Bulgaria, Cyprus and Romania, with Croatia bringing up the rear.
While the ranking of countries is broadly in line with what one would expect given recent economic data, Romania’s low score is a bit of a puzzle given the strong growth rate in 2013 (3.5 per cent), which has continued into 2014, with the country recording the highest growth rate in the EU in Q1 2014.
Historically, levels of consumer confidence tend to be lower in CoOs relative to the rest of the EU and exhibit higher volatility (see Figure 2). This figure reveals some interesting regional patterns. The only countries where consumer confidence has been on average positive over time are the three Scandinavian EU members (Denmark, Finland and Sweden) as well as the Netherlands.
The central European and Baltic (CEB) countries are mostly clustered together with an average index score of between -15 and -25 and a standard deviation typically between 12 and 15. Most strikingly, a group of south-eastern European countries – along with Cyprus and Greece, as well as Hungary – exhibit very low levels of confidence over time (average scores of -30 or worse), along with high variation.
Figure 3 shows how consumer confidence has changed in the past year. Throughout the EU there has been a major positive shift – more than 15 points on average between May 2014 and one year earlier. The index in some Eurozone periphery countries such as Ireland and Portugal has jumped almost 30 points. Even Cyprus, which is still in a fairly deep recession, is up more than 20 points, albeit from a very depressed level a year ago.
Once again, there are some evident sub-regional groups emerging. The Baltic states are little changed relative to a year ago but, as noted earlier, consumer confidence in these countries is already close to the EU average. The central European countries (Hungary, Poland, Slovak Republic and Slovenia) are up significantly, but Bulgaria, Croatia and Romania appear to be stuck in a low confidence equilibrium.
These data matter to the extent that they affect economic outcomes. Many researchers have investigated the links between confidence and variables such as GDP, consumption spending, investment, unemployment and others. While the results vary from one study to another, the broad consensus is that changes in consumer confidence can influence subsequent economic variables.
It is not difficult to see why that might be the case: a drop in consumer confidence usually leads people to postpone or cut back on spending, which depresses consumer demand and can lead to business failures and falling investment.
We have examined the correlations in each CoO over the past ten years between the quarter-on-quarter (QoQ) change in the confidence score and QoQ real GDP growth (see Figure 4). The results range from a weak correlation in Cyprus (0.07) to relatively robust correlations in some cases, reaching 0.52 in Romania. Of course correlations tell us nothing about causation, but it is not implausible that changes in confidence have an influence on subsequent GDP movements in the emerging Europe. This hypothesis will be the subject of future research.