The virtue of positive economic sentiment
The relationship between economic sentiment and growth tends to be mutually complementary. That is, people? views of the economy? future will lead to changes in economic performance, while economic changes will lead to adjustment in both consumers?and companies?outlooks. While this relationship clearly exists, economists are often less sure about what drives changes in economic sentiment. Indeed, economic statistics often do not capture the true effect of economic change or its causes. One major reason for this discrepancy is that individuals and companies use different yardsticks to measure the economy. Consumers base their views on real income levels, while firms tend to rely on stock prices, sales and per-capita labor costs.Economic statistics often fail to capture how economic changes actually affect consumers and companies. Diverging performance between real GDP, which measures the economy? overall performance, and real GNI, which gauges overall purchasing power, illustrates this point. Since the mid-1990s, growth in real gross domestic product (GDP) has outstripped real gross national income (GNI). The average gap between the two figures increased from 1.2 percentage points in the 1996 to 1999 period, to 1.8 from 2000 to 2006.
This growing disconnect is commonly attributed to deteriorating terms of trade; i.e. the price of imported goods is generally increasing while the price of exported goods is decreasing. Worsening terms of trade, however, only partially account for this. The limited ability of GNI to communicate how economic changes actually affect different economic participants provides a more compelling explanation. For example, real GNI increased 2.3 percent in 2006, indicating that overall purchasing power expanded. While household incomes rose 3.1 percent, real operating profit for businesses decreased 6.6 percent. This means that real GNI for 2006 understated the economic reality of households, but overstated that of firms.
Economic reality sometimes differs for consumers and firms, and different motivations may drive their respective sentiments. In order to better understand this dynamic, Samsung Economic Research Institute conducted a study to find out what variables played the main role in economic decision making.
After consumer sentiment bottomed out in the fourth quarter of 2006, SERI? ?onsumer Attitude Index?rose to 48.5 in the second quarter of 2007, the highest since the 49.3 registered in the second quarter of 2006. Rising disposable income and stock prices positively affected consumer sentiment, with widening income inequality and the ?isery Index?negatively affecting consumer sentiment.
In the first quarter of 2007, real disposable income grew at an annual rate of 7.1 percent, more than offsetting the negative impact of higher unemployment, and leading to a higher-than-benchmark consumer sentiment index of 103.
Business sentiment, following consumer sentiment, has also peaked recently.
The writer is a research fellow at the Macroeconomic Research Department, Samsung Economic Research Institute.
sy7272.hwang@samsung.com.
By Hwang Sang-Yeon
with the Korea JoongAng Daily
To write comments, please log in to one of the accounts.
Standards Board Policy (0/250자)