A spirited way to look forward

Ever heard of animal spirits? Don't be too quick to think about voodoo, yet. It's just a popular phrase in economics which is used to convey the idea that optimism is the driving force that keeps an economy galloping forward.

In 1930s, the famous economist John Maynard Keynes wrote that people's decisions to do something positive "can only be taken as a result of animal spirits - a spontaneous urge to action rather than inaction". This human element should not be ignored. Keynes cautioned that "if the animal spirits are dimmed and the spontaneous optimism falters, enterprise will fade and die."

This is why, for some economists, measuring consumer confidence plays an important role in forecasting economic conditions and the future spending of consumers. They believe that a consumer's decision to buy or not to buy a new property after six months or a year later is influenced by a lot of factors. These could be concerns about employment, regular income, stock market or the quality of life. In other words, a consumer who is optimistic about his pros-pects is likely to spend more, and businesses, as a result, will be happy to roll the dice.

The recent consumer confidence survey conducted by MasterCard reveals that the UAE's consumer confidence has picked up from 78.5 six months ago to 85.4. According to the survey, UAE consumers are now more confident about the country's job situation, income, quality of life and economy. That might be surprising considering the cost-of-living issue.

The perceptions of UAE residents, in fact, were influenced by a number of factors. The current construction boom in Dubai, for one, makes people think that what lies ahead is a prosperous future. "The semi-completion of Dubai is evident everywhere. People are now beginning to see the Metro coming up, for instance," says Denzil Lawson, general manager of MasterCard Worldwide, Middle East and Levant.

Following the Keynesian thinking that a confident consumer is willing to spend, does this mean to say there's no trouble ahead for the economy?

There's no question that the consumer confidence index is a reliable gauge of how consumers feel. But some economists say that such indexes are poor predictors of consumers' eventual spending habits.

A study conducted by Dean Croushore, professor of economics at University of Richmond's Robins School of Business, reveals that consumer confidence surveys have no value at all in economic forecasting, since there's no correlation between how people say they feel about the economy and how they actually behave. "People may say they're dissatisfied with the economy, but then they go out and buy a car," Croushore said.

So, a fall or rise in confidence and expectations isn't a sure sign that consumers will cut back or boost their spending. Spending is much more dependent on one's ability to buy.

How a person spends is more reactive to tangible factors such as jobs and incomes. A consumer may feel the city he's living in is growing richer and far more developed than ever, but if his income is as low as that of a labourer, buying that piece of property would be farthest from his mind. Certainly, the power of animal spirits isn't working here. Or maybe, only "the spirit is willing but the flesh is weak." Then you could guess that the outlook is not so strong, after all.