The biggest challenge for a recovering economy is confidence. Continued confidence in the future is essential for the expansion of economic activity.
Confidence is spread by word of mouth. A person who has been successful in an endeavour tells some of his friends about what he has achieved. Some of the friends feel more confident, so they decide to have a going at doing something different. Confidence is contagious and encourages economic activity.
When businesses are confident, they buy more stuff, so other businesses get to sell more, which means they can buy more from other businesses. When people are confident, they are willing to buy more, which helps businesses trying to produce more things.
New Zealanders are not as naturally confident as Americans, but over the last few decades, they have become increasingly confident, and that has been good for the economy. Many people have started innovative new ventures, and they have been successful.
Unfortunately, New Zealanders have become comfortable with debt too. They are comfortable buying a house with a ninety-percent mortgage. People are confident with living from payday to payday without any savings in reserve. Instead, they rely on credit cards and fast loans to tide them across lean times.
Politicians worry about confidence. The banks try to measure it with "Confidence Surveys". Some politicians try to talk it up. The problem is that once confidence disappears, it almost impossible to restore.
My Dad, who grew up during the Great Depression used to say,
During bad times, people think they will last forever.That is true. Confidence is self-reinforcing. During good times, people think they will last forever, so being confident is easy.
During good times, people also think they will last forever.
Lack of confidence is also self-reinforcing. When times are bad, people assume they will last forever, so it is very difficult to be confident.
One of the words that is the opposite of confidence is "depression". The economic collapse that occurred during the 1930s was called the Great Depression because everyone had lost confidence and became gloomy about the future.
The difference between a recession and depression is not a greater decline in GDP, but a difference in attitude. A recession is caused by an external shock, but people remain confident that the economy will quickly recover. During a depression, everyone loses confidence and expects the bad times to continue.
Economic behaviour changes during times of depression (lack of confidence).
People stop spending because they think it might be better to wait until the future is clearer, and the thing they want to buy might be cheaper.
People save more because they want a buffer in case something worse happens.
People stop buying big things like appliances, furniture and cars because they don't want to go into debt.
People start paying off debt to take the pressure off their income.
People who have lost their jobs and their income have to shut down hard on all their spending.
People who have lost their income might need to sell their home because they cannot manage big mortgage payments.
Businesses cut back spending hard. They only purchase inputs that are essential. Not-essential purchases are deferred.
Purchases of capital equipment will be postponed, to save cash reserves and/or to avoid additional debt.
Existing plant and machinery will be kept going a bit longer with a bit of extra maintenance.
New ventures that might risky will be deferred until the economic situation improves.
Rather than taking on new staff, businesses will prefer to give expanded hours to existing staff.
The other word that is opposite to confidence is uncertainty. Uncertainty changes peoples' behaviour, so entrepreneurs and business people hate uncertainty. An increase in uncertainty can undermine confidence.
A recovering economy might face the headwinds of a collapse of confidence and increased uncertainty. It is certainly a time for men and women of God of faith to step up and lead.
