Confidence is an economic indicator which measures the degree of optimism that felt about the overall state of the economy.
How confident people feel affects their economic decisions, such as spending activity, and therefore serves as one of the key indicators for the overall shape of the economy.
In essence, if confidence is high, consumers and businesses will be making more purchases and investment decisions. On the other hand, if confidence is lower, the tendency is to save more and spend less.
Confidence typically increases when the economy expands, and decreases when the economy contracts. However, this does not necessarily happen, since we rarely have access to perfect information on the situation of the economy and rely heavily on internal data and external messaging.
Messaging matters. We may like to believe we are immune to external influence, however a multi-billion pound marketing industry shows this to be far from the case.
Data in the last week has shown that UK manufacturing growth remains above average and is broad-based; the MPC expects increases in Bank Rate to be gradual and limited, with the first rate rise not expected until the second half of 2015; small and medium-sized (SME) manufacturers’ output grew over the last three months; and unemployment dropped by 115,000 to 1.96m in the three months to September.
However David Cameron appeared to be in a gloomy mood at the G20, his ‘red flashing light’ analogy highlighting how slowing growth in emerging markets, of which China is the biggest, and stagnation in Europe were threats to the stability of the global financial system alongside the escalating dispute over eastern Ukraine and the Ebola crisis.
And as the red lights made headlines, I have been surprised at the impact that those comments have made on confidence during my conversations with businesses, compared with cautious optimism the week before.
There is a backdrop of solid UK growth but also increasing global risks which are generating head-winds. These winds are being felt differently across sectors, with mechanical engineering growth the lowest for two years, being offset by stronger performance in the aerospace sector.
It is fundamentally a complex and uncertain picture, and I am not for a moment suggesting that Cameron’s concerns were unfounded. It was the power those comments had to directly affect confidence that is worth highlighting.
Confidence takes months to build and moments to lose, and confidence directly affects our economy.
As we move closer towards the General Election, business and individuals alike will be bombarded with an ever increasing intensity of short-term messaging, often designed more to persuade than inform.
Message makers - you have a huge amount of power in your hands, please use it responsibly.