The confidence economy

Following a long recovery from the financial crisis, both businesses and consumers alike are yet again in a downbeat mood. What does it mean when confidence levels plunge to new lows? …and what should businesses do about?

If the definition of confidence is the belief that something can be relied on, then there is very little of it around these days. In January, the latest release of the Confederation of British Industry’s latest Industrial Trends Survey made for uncomfortable reading.

Business optimism had fallen through the floor, with sentiment towards exports falling at its fastest pace since the 2008 financial crisis and a notably large number of companies signalling that they were pulling the plug on investments in the coming year. The UK is not alone, either. The Organisation for Economic Co-​Operation and Development’s indicators for business and consumer confidence all pointed in one direction – down.

During a normal economic cycle, this kind of sentiment would be expected at the onset of a recession or a prolonged downturn. But these are not normal times. A decade after the financial crisis, many economies remain in recovery mode with central bank stimulus still in place. Across Europe and the US, a wave of populism has created a new form of a political uncertainty. And in the UK, the clock is winding down on a two-​year Brexit process that, rather than produce a clear idea of the future trading relationship with the European Union, has taken its toll on both consumer and business confidence.

As indicators go, surveys of business and consumer confidence measure something that seems intangible. At their most basic, they express opinions of current and future conditions. Yet there is no denying their tangible influence on the broader economy. For example, in the years following the 2008 financial crisis, business confidence in the US steadily improved as the country experienced a recovery in housing, the stock market and the overall economy. Sentiment gained even more momentum when President Donald Trump introduced tax reforms that benefited the corporate sector.

I don’t see a recession this year, but maybe the end of next. The question is more, what happens if we do end up in a slowdown?

Michael Brown, markets analyst, Caxton FX

It has been a different story in the UK, however. Despite sentiment improving during the economic recovery, a new threat was keeping citizens up at night: Brexit. In the days following the UK’s vote to leave the EU, business confidence fell to its lowest level since the depths of the financial crisis. Fast forward to the present day, and the uncertainty over where Brexit may lead has resulted in both consumer and business confidence hitting new lows.

So gloomy is the outlook that Tony Groom, chief executive at K2 Partners, says the lack of confidence in the UK is palpable. “The question is, what’s driving that lack of confidence? Is it Brexit or is it this perceived fear of the unknown?” he says. “There is certainly a greater level of anxiety.”

At a corporate level, some of those anxieties have resulted in drastic decisions. In January 2019, Japanese conglomerate Sony announced it was moving its European headquarters to Amsterdam from London, owing to Brexit uncertainty. The company said the switch would take place on 29th  March, the same day the UK is set to leave the European Union, because it believed it was better to prepare in case the two sides split without a deal.

If the UK can take any solace from the situation, it is that losing Sony’s HQ is more symbolic in that it is unlikely to result in job losses. It’s a different story for many positions at financial companies based in the City of London, where the likes of Morgan Stanley, Goldman Sachs, Citigroup, JP Morgan, Bank of America and UBS have already shifted several hundred staff each to the continent.

While it is difficult to pin down the exact number of financial sector jobs that have been moved to the EU, Reuters’s fourth survey of leading financial services companies in January pegged it at around 2,000 so far. In the short term, financial firms have shouldered significant costs in preparing for Brexit, with the research further suggesting the sector as a whole has invested hundreds of millions of pounds shifting assets, functions and putting contingencies in place.

Of course, blaming Brexit for job losses and corporate relocations may simply be an easy excuse that masks much broader issues in the global economy. Following a prolonged period of expansion following the 2008 financial crisis, market observers are beginning to worry about when, rather than if, the next downturn will arrive. Throughout much of 2018, the US was the main driver of global growth as tax reforms boosted business confidence and corporate earnings received an uplift.

Away from the US, however, conditions appear to be on a less firm footing and this has some people worried. “We now have a global economy where, once something happens in one part of the world, everyone knows about it,” Mr Groom says. “On one level, people would argue that’s a good thing. If you’re an investor who wants the flexibility of moving your money around, you might think that’s great.”

The problem, however, is that increased globalisation means that changing sentiment in one economy can have reverberations around the world. For Michael Brown, markets analyst at Caxton FX, many of the headlines focusing purely on Brexit uncertainty may be glossing over the reality that the global economy is beginning to turn. “Rather than saying they’re struggling as a company or entering a downturn, they are pinning the blame on politics, passing the buck,” Mr Brown says.

Mr Brown says it is difficult to get a clear reading on what exactly is happening to the economies of China, Europe, the US and the UK, but there is growing evidence that the cycle may be coming to an end. “I don’t see a recession this year, but maybe the end of next,” he says. “The question is more, what happens if we do end up in a slowdown?”

The old saying goes that, when America sneezes, the rest of the world catches a cold. But this is now also true of China, as its economic influence expands around the globe. In the past decade, GDP growth in the world’s second-​largest economy has decelerated steadily, to 6.6 per cent in 2018 from 14.2 per cent in 2007. With the burgeoning Chinese middle class becoming an increasingly important market for developed market exporters, we are now witnessing the first casualties as the Chinese economy softens.

That slump in growth is at least partly to blame for slower sales at Jaguar Land Rover, maker of luxury cars and Range Rovers. In January, the company confirmed it was cutting 4,500 jobs – most from its UK workforce – owing to a sales slowdown in China and a growing distaste for diesel cars.

Similarly, when Nissan announced in early February that it had decided not to build the latest version of its X‑Trail SUV in Sunderland as promised, and instead do so in Japan, its rationale was much bigger than Brexit. Despite pledging in October 2016 that it would build the sport-​utility vehicle in England, the market for diesel-​powered autos has changed dramatically across Europe. For the UK alone, data from the Society of Motor Manufacturers and Traders (SMMT) show sales of diesel-​powered cars fell by 20 per cent year on year in January.

For the most part, automakers have faced tougher sales conditions as buyers have grown wary of diesel given the potential for tougher environmental regulations and higher costs. These factors, in addition to Brexit uncertainties and the potential risks to the supply chain, undoubtedly influenced Nissan’s decision.

Such short-​term decisions are often necessary to protect a company’s immediate bottom line, but the long-​term impact will be much more widespread, analysts say. Mr Brown at Caxton FX says uncertainty causes companies to hold off on investment or shut down part of their operations, which could have a significant effect on the economy in the long term.

“Not only is there the immediate result of people not having a job, but you look at the future where the jobs that would have been created are not created, and the area becomes deprived. And from a socioeconomic perspective you have an area that’s deprived, with high unemployment,” he says.

Data from the UK Office for National Statistics show gross fixed capital formation, a measure for business investment, has dwindled since the EU membership referendum. After stagnating in 2016 and 2017, it turned negative as businesses increasingly held of investment decisions. According to ONS, business investment is estimated to have fallen by 1.1 per cent between the second quarter and third quarter of 2018.

The lack of business confidence in the economy gives Steve Taylor, partner at Eight Advisory, cause for concern. “In the UK today it is demonstrable that investment in business since the Brexit decision has gone through a slowdown,” he says. “What we’ve also seen during the same period is the UK going from having a high growth rate in the European Union to being bottom of the pack. There’s probably a link between failure to invest and what that does for the country.”

The question is, what’s driving that lack of confidence? Is it Brexit or is it this perceived fear of the unknown?

Tony Groom, chief executive, K2 Partners

The long-​term effects of holding back investment can put companies at a disadvantage in the long term as well as cause unwanted consequences on an economy. This is especially the cause during times of recession when companies should be thinking about their strategy when the economy bounces back.

Complicating matters is the fact that companies are reliant on consumer spending, which has not only been shifting in recent years, but is also subject to the vagaries of the economy. Consumers are in a fragile state, having endured high levels of inflation and stagnant wages. Add to this the fact consumer lending is at high levels and savings rates are low, and you have an added layer of vulnerability should another downturn come.

“The two things that matter most to businesses are certainty and confidence,” says Tim Wainwright, head of operations at Eight Advisory. “The absence of both things to me are a lead indicator of challenges ahead.”

While the lack of certainty and confidence often drives businesses and people to seek locations where conditions are more favourable, pickings are slim in the current climate. Europe has struggled with low levels of growth and both Germany and Italy are facing recession. Geopolitical risks around the world are heightened, while a large debt overhang continues to plague governments. Even in the US, where leading indicators predict high levels of confidence, there is an underlying disquiet.

In many ways, the vicious cycle of pessimism, low confidence and worries of a pending recession could become a self-​fulfilling prophecy. And when the lean times do hit, inevitably it will be discretionary spending that goes first.

Non-​essential, big ticket items are always the first to be sacrificed by both consumers and businesses during periods of belt-​tightening, says Chris Labrey, managing director for UK and Ireland at Econocom. He says uncertainty such as Brexit makes businesses reluctant to make decisions and puts them in a waiting game until the path forward is clear. “While this might be financially prudent, businesses still need to operate as usual,” he says. “Reduced confidence in the economy isn’t a reason not to invest in the right technology – after all, the right technology estate enables business growth and spurs innovation — just what economies need.”

Even during times of low confidence, however, there are opportunities for companies to flourish. While people may avoid spending money on meals in restaurants or defer buying new sofas and televisions during straitened times, they will continue to spend money on positive experiences, such as visiting ice cream parlours and coffee shops. “Discretionary spending will always reduce, but you still like to treat yourself. You may stop going out for lunch, but you still go out as a family to have an ice cream,” Mr Taylor says.

Similarly, companies that focus on creating flexible supply chains and offer a unique selling point will fare best, Mr Taylor says. Luxury brands such as LVMH and discount fashion stores such as Primark are positioned to weather a downturn because the occupy ends of the market where demand tends to be strongest. The DIY sector is also positioned well, he says, because during periods of lower confidence people tend to decide to improve their current home rather than buy a new one.


  • Stress test your business to gauge how it will perform during periods of lower confidence
  • Seek to expand into new markets where possible
  • Diversify your product offering into an area of consistent demand
  • Focus your finances and try to find efficiencies that boost your margin
  • When a downturn comes, invest in the future
  • Don’t slow down on marketing: people continue to spend during downturns