Previously, I’ve argued that consumer confidence is almost always determined by national economic conditions, rather than by global events, or events in one or more other countries. The one exception to that rule in recent memory was the 2009 financial crisis that originated in the U.S. Because the U.S. makes up one-quarter of global GDP, the effects on confidence were felt worldwide.
There was another reason for the effects of the financial crisis on confidence. When Nielsen’s global consumer confidence index—Nielsen conducts a quarterly online survey in over 60 countries—registered a 20% decline between the first quarter of 2007 and the first quarter of 2009, it was in part because the financial crisis was, for most consumers, completely unexpected.
When consumers know what to expect, and are not feeling uncertain, they can tolerate a lot. Inflation, high or low, matters more or less depending on how far those affected anticipate it and can consequently incorporate it into their expectations about coming price changes, but consumers often react strongly when inflation or deflation is unexpected. They don’t like economic surprises.
While economic growth in Europe has been weak for years, consumer confidence has increased in recent quarters, and consumer spending has been a bright spot within many European economies. They didn’t expect strong growth, so took weak growth in stride. Even in Russia, which never really recovered from the financial crisis, consumer confidence did not drop precipitously when Russia entered a period of recession combined with high inflation in late 2014. Russian consumers had already shown high levels of concern about inflation and rising food prices, which suggests they recognize that high inflation is likely—so we didn’t see a big confidence drop when it happened.
Brazil entered a period of recession and high inflation at about the same time as Russia. However, Brazil’s situation was exacerbated by political scandal, uncertainty about the state’s ability to service public debt, and a central bank that raised interest rates as the economy moved into recession. What to expect from this complicated set of events was not at all clear to Brazilian consumers (or others). The result was a significant drop in consumer confidence from a high of 112 in first-quarter 2013, falling continuously to 76 in fourth-quarter 2015. Brazilian consumers’ inflation expectations are all over the map, and do not suggest a broad understanding that inflation is high and is likely to continue to be so in the near term.
Malaysia is another country in which recent uncertainty about what to expect from the economy is plaguing consumer confidence, though with a different root cause. In Malaysia, political instability emerged before and independently of economic weakness, but the concern now is that continuing economic weakness may be a consequence of this political instability. Indeed, in recent quarters, GDP growth has decreased, although it is still in positive territory. But again, the degree and nature of the instability, and how it may lead to changes in consumers’ circumstances, is highly uncertain. Not surprisingly, then, Malaysian consumer confidence declined from 99 in third-quarter 2014 to 80 in fourth-quarter 2015. Uncertainty in the political arena and about its consequences for the Malaysian economy appear to have spilled over powerfully to how consumers think about their own economic prospects and their willingness to spend.
These examples show us that when consumers do not know what to expect of their local economic and political environment, they become less confident. The degree of stability consumers feel matters as much as how good or bad the economy and labor markets actually are—which is why these two things do not by any means move in lockstep.
Consumer expectations matter enormously because consumption is an important part of most global economies. In the U.S., at one extreme, household consumption represents three-fourths of GDP. In China, at the other, it is still below 40%. In most economies, however, consumption is at least half of GDP, and the median level is above 60%. So a big decline in confidence because consumers are feeling uncertain about their financial situation may both presage and contribute to economic decline. Confidence is the lens through which consumers see their economic environment, and what we see influences how we respond.
We may now be on the brink of another of those exceptions to the rule—a global development that drives declines in consumer confidence around the globe, on a scale not experienced since the 2009 financial crisis. This time, however, if it comes, it will not be triggered by events in the U.S.—indeed, the U.S. is now a relative bright spot on the global scene, a consumer-driven economy that the American consumer appears to be happy to drive for now—but by global uncertainty. Outside the U.S., the world seems to be getting the jitters.
One important piece of evidence that we are, generally, in a highly uncertain state is the recent volatility of equity and commodity markets around the world. Another is that central banks in major economies are pursuing divergent monetary policies, and that many have recently questioned the efficacy of monetary policy to manage economies in general. A third element are the concerns expressed by many that emerging market debt quality is deteriorating significantly. If confidence does drop across markets, it will be because consumers, seeing these signals, really are worrying about how slower global growth and the ability of governments around the world to manage it might affect their economies or their governments’ economic policies. Such a drop in confidence would create a self-fulfilling prophecy, as lower spending in a world in which consumption makes up the majority of most major economies reinforces the likelihood of the global economy moving into recession.
Given the risk of a self-fulfilling prophecy taking hold, what can governments do? If they can manage consumers’ expectations as the global economy slows, confidence could remain stable, even amidst the slowdown. Managing expectations requires extreme transparency into what policies are being put in place, what their intended effects are, and when and how they will be executed. Transparency raises confidence in general—people want to understand what policies are being conducted and what the direct implications are for them. They also want to be sure that the policies undertaken are fair.
In some economies, it is thought that what an individual country’s monetary policy can do has already mostly been done, and so the importance of fiscal policy choices and multilateral action will increase. The political process to pass fiscal stimulus legislation is complicated, and it is not my purpose to suggest what fiscal policies governments should adopt: merely that any change should be done openly and as quickly as possible. Post-financial crisis examples are the fiscal austerity policies of many European countries. These policies have not been without their critics; but it is noteworthy that European consumer confidence has been relatively buoyant. There are also increasing calls for new forms of multilateral economic governance to be able to coordinate policy more effectively; recent examples include the Asian Infrastructure Investment Bank and the proposed Trans-Pacific Partnership. Political leaders have shown that, in urgent situations, they can act to pass and implement fiscal policy quickly and that they can act jointly with leaders from other countries. Doing so will support consumers’ confidence in their policy makers and thus in their own economic prospects.
This article originally appeared on Forbes. Louise Keely is president of Demand Institute and a senior vice president at Nielsen.