Why confidence is key

“It is not important whether or not the interpretation is correct, if men define situations as real, they are real in their consequences.” W.I. Thomas

The Thomas theorem is a useful tool for understanding and explaining human behaviour in specific situations; and looking at the Consumer Market Monitor published by the Marketing Institute of Ireland earlier this week, it may well explain something that’s going on in the Irish economy.

The Consumer Market Monitor relies on a model of consumer behaviour that sees economic variables such as income levels, taxes, interest rates and exchange rates influencing consumer confidence, which in turn influences consumer spending. 

Bringing together data from a number of sources, it shows that consumer confidence is on the rise. People are spending money again and they’re spending it on a wide range of goods and services. This is despite the fact that disposable incomes are still under pressure. People are largely no better off but, crucially, they feel better off, they feel like they can move on from needing to save and pay down debt and this is having real consequences for the economy.

There are a few reasons for this. Many people are more secure in their jobs and no longer feel the threat of redundancy. Rising house prices also mean that negative equity is less of an issue for some. The realisation that the burden of debt is easing brings with it a security that becomes a confidence and a willingness to spend money. Rhetoric around potential tax cuts and pay increases, albeit probably premature and driven by election minded public figures, is also adding to the improvement in perception.

This is all good news for the economy. With consumer spending accounting for 60% of GNP in Ireland, there is no doubt that increased spending will have many positive effects. As businesses and SMEs in particular feel the benefits, they may employ more staff. This increases the amount of money in the economy and creates a virtuous circle from which everyone benefits.

These interpretations and perceptions present a great opportunity for the Government. Budget 2015 can capitalise on the positive momentum. Measures must be introduced that will support SMEs, incentivise job creation and promote further spending. All of which can help to make sure people don’t just feel better off, they will actually be better off.