Consumption and Its Influence on the Economy

Consumption and Its Influence on the Economy

2022-05-26 • Updated

How to understand if an economy is accelerating or decelerating? What are the indicators that can guide us in this interpretation? One of the ways in which we can assess this situation is precisely the household consumption, which fundamentally refers to goods acquired to satisfy the personal needs of families, through the purchase of goods and services.

Household consumption is one of the elements that, for example, form part of the calculations of a country's GDP (Gross Domestic Product). When families are spending a lot, the economy tends to heat up. In effect, one of the most renowned formulas for calculating GDP is the following:

GDP = C (household consumption) + I (private investment, whether by entrepreneurs or companies) + G (government spending) + [EX (exports) – IMP (imports)]

In short: when consumers are spending (buying cars, clothes, houses, going out to dinner), it exerts a positive effect on the overall economic activity, which can be an indication that the country's economy is expanding. The opposite situation, namely, the contraction of spending by economic agents represents, in turn, an important sign of economic slowdown.

Another important thing to analyze in relation to consumption is the leverage cycle, that is: when consumers are heavily indebted (due to borrowing from banks or using credit), they tend to reduce expenses, affecting the economy as a whole. When consumers are less indebted, they tend to spend more and leverage themselves financially. Another important factor to take into account is consumers' perception of inflation and expectations about the country's economic situation for the coming months or years, which can end up influencing their decisions about spending, indebtedness and savings, which also have an effect in the (macro)economy. Consumer confidence is generally high when the unemployment rate is low and GDP is going through periods of growth for instance.

In the FBS economic calendar https://fbs.com/analytics/calendar , our clients can find important indicators regarding consumption, such as the following:

  • The Swiss Consumer Confidence, which assesses the economic and financial situation of Swiss families, taking into account aspects such as: inflation, job security, etc.
  • British BoE Consumer Credit, which deals with loans taken out by UK individuals to finance expenditure with goods and/or services, excluding student loans.

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We see that in view of the higher volume of borrowing by UK individuals between 31.10 (824 million £) and 30.11 (£1,079 billion), a heating of the British economy was demonstrated, reflecting in the appreciation of the GBP against the USD.

  • The American Consumer Credit Change, which refers to flows of credit granted to individuals for household, family and personal expenses, excluding loans secured by real estate (mortgaged). In the United States, there are also the Michigan Consumer Expectations and Michigan Consumer Sentiment, which assess: how consumers view their current financial situation, as well as the prospects for the country's economy in the short and in the long run. However, there is also the Consumer Inflation Expectations, which measures household inflation expectations for the coming year.

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We see that in view of the greater volume of credit injection flows to individuals and families in the United States demonstrated by the Consumer Credit Change index between 11/30/2020 (USD 10.71 billion) and 6/30/2021 (USD 38.19 billion), a heating of the American economy could be perceived, reflecting in the appreciation of the USD against the JPY (Japanese yen) for example.

  • Australia's Westpac Consumer Confidence Change and Westpac Consumer Confidence Index, reflecting consumers' assessments of their households' financial situation in the previous year and for the following year, based on their insights into anticipated economic conditions in the future and over the next five years. Australia also has the Consumer Inflation Expectation, which measures consumers' expectations for price growth (inflation) over the next 12 months.

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We see that in view of the improvement in the indicators of the Westpac Consumer Confidence Index between 31.03.21 (111.8 points) and 30.04.21 (118.8 points), there was a perception of heating of the Australian economy, reflected in the appreciation of the AUD against the USD.

  • The Japanese GDP Private Consumption QoQ Prel, which assesses Japanese households' final consumption expenditure against supply-side estimates.
  • Europe, in turn, has the Consumer Confidence Flash, which measures the level of optimism of European consumers about the economy, based on issues involving: the current economic and financial situation, savings prospects, as well as household expectations regarding: (future) consumer price indexes, general (macro)economic conditions, etc.

Other countries (such as Mexico and Turkey, for example) also have their own indexes on consumption and household expenditures, which can provide traders with an interesting indication of the economic situation in a country of their interest, being at the same time an important factor for their decision-making in the FOREX market.

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