There’s a fine line between being a Pollyanna and a doomsayer in the face of today’s economic climate. A don’t worry, be happy approach is clearly out of touch with reality. But all the doom-and-gloom stories run the risk of creating a self-fulfilling prophecy.
The media is no help in that regard. Yes, the financial crisis and the resultant fallout are stories that have to be covered, but it seems sometimes outlets are in a race to present the gloomiest forecasts and grimmest prospects. This in turn can cause people to worry perhaps more than necessary, eroding consumer confidence and sending our consumer-driven economy down a little more. More bad news follows, and the cycle repeats itself.
“The real stuff happening in the economy matters, but so does the way we perceive it … and how we react,” says Glen Hodgson, senior vice-president and chief economist at the Conference Board of Canada.
The psychology of recession, he says, may have us seeing a bleaker picture than the reality of the situation. You can’t stick your head in the sand, but you can’t let the economic news shape your every move.
“Confidence among consumers and investors is an important element in keeping the wheels of commerce moving, or in slowing them down. If we are confident in the economy as a whole, in our job prospects and in our ability to keep earning, we are likely to buy more, to invest more and to take long-term decisions in favour of more buying and more investment. This positive attitude creates upward momentum in the economy,” he writes in a recent assessment.
“If, however, consumers and investors are influenced by all the recession talk, adopt a more negative attitude and suffer a drop in confidence, then we are less likely to buy and invest and to take long-term decisions. We hunker down, retrench personal and investment spending in an effort to husband cash – and end up making the overall economy even worse through a pull-back in aggregate demand. The psychology of recession becomes a self-fulfilling prophecy – if we feel bad, things do indeed get worse.”
In other words, the more we panic about what could happen, the more likely it will happen.
That’s not to say there aren’t reasons to worry. Nor does that negate the fact that there are people who have lost their jobs, and more who likely will – for those people, the economy is front and center. For them it’s a harsh reality. There’s something to be said, however, for the rest of us to do what we can to improve things. Or at least not to add to the downward spiral.
“Even with the unemployment [projected], 92 to 94 per cent of us will still have our jobs, and we’ll still need to go on doing the things we’ve always done,” Hodgson explains from his Ottawa office.
“Why change your behaviour?”
Why, indeed. That’s at the heart of his treatise about the link between confidence and the health of the economy.
If your job and finances are stable, you might even see some benefits right now. Low interest rates reduce debt-servicing costs, allowing some of us to pay down debt or to free up some additional cash. The temporary tax cuts and stimulus measures announced in last month’s federal budget may provide a few additional dollars, as well – another opportunity to tackle debt, boost savings or do a little bit of extra spending.
It’s the latter the government is particularly looking to encourage. Its own stimulus spending will also put more money into the economy, though the timing remains an unknown. Hodgson expects to see things pick up as the money makes its way through the system, perhaps through such measures as the home renovations encouraged in the budget. Some visible improvement might be seen in the second or third quarter of the year.
Although we’ve been moving into an official recession, there was some good news in January, as the Conference Board saw a slight increase in that all-important consumer confidence.
The question now in regards the recession is whether it will be U-shaped, that is somewhat protracted at the bottom before improving, or V-shaped, quick to head up after reaching the low point. Hodgson’s in the latter camp. That’s a better scenario, and any news that shows an upward trend is likely to do wonders for our confidence.
There is, it seems, reason to be optimistic. More so if we start to see structural changes that move us away from what got us in this mess in the first place: deregulated financial markets, poor credit management and misplaced consumerism (ironically, it’s spending that’s supposed to lift us out of the recession, but that’s another story).