Consumer confidence and share prices slump simultaneously

18/08/2011 15:00

Each month, Statistics Netherlands measures consumer confidence. Consumer confidence is affected by numerous factors, like unemployment, share prices, developments on the housing market and inflation. Many consumers are involved in share trading. This is not only because they themselves are active traders on the stock market, but they are also involved indirectly, for example through their pension funds.

AEX index and consumer confidence

AEX index and consumer confidence

Consumer confidence and share prices go side by side

The mood among consumers deteriorated substantially in August 2011. The indicator reflecting consumer confidence plummeted by 9 points to -21. The confidence setback is on a par with the recent fall in share prices. In previous years, a similar patron could be observed. When the situation on the stock market deteriorated by the end of 2000, pessimism among consumers started growing. After a record low early 2003, share prices recovered and consumer confidence increased again. By mid-2007, consumers were in high spirits. The AEX reached a record high. Shortly afterwards, in September, confidence collapsed, partly due to the outbreak of the credit crunch in the USA. Share prices also slumped. The recession lasted until early 2009 when both indicators recovered only to slump again in the summer of 2011. 

One in four households own shares

The relation between share prices and consumer confidence is partly due to the direct involvement of households with the stock market. At the end of 2010, shares owned by Dutch households had an overall value approximating 224 billion euro. Investing in shares became popular among private individuals in the mid-1990’s. Previously, investing in stocks and shares had been the exclusive domain of professionals. The number of share-owning households doubled between 1995 and 2000. Private investors remained active on the stock market. Early 2010, nearly 1.7 million households – almost one in every four -owned shares.

Value of shares owned by households at the end of the year

Value of shares owned by households at the end of the year

Anxiety about old age provisions due to problems pension funds

Households were also indirectly involved in the stock market through their pension funds. Pension funds invest a substantial part of the money entrusted to them in shares. At the end of 2010,  these portfolios had an estimated value of 472 billion euro, more than twice as much as at the end of 2000. Indirectly, developments on the stock market are a key factor in consumer confidence.

Value of shares in portfolios pension funds at the end of the year

Value of shares in portfolios pension funds at the end of the year

The stock market crisis had a negative impact on the mandatory degree of coverage of pension funds. This is the ratio between the value of investments and their financial commitments. The minimum coverage ratio of pension funds is set at 105 percent. Pension funds must submit a recovery plan, if the coverage ratio drops below the minimum. Recently, pension funds faced serious underfunding due to a combination of a low long-term interest rate and plummeting share prices. Various pension funds no longer comply with the minimum coverage ratio. For consumers, this leads to uncertainty about their old age provisions.

Dropping share prices: worries about unemployment

In the consumer confidence survey, people are asked about their expectations regarding unemployment in the next twelve months. This indicator too partly depends on developments of the AEX index.. The percentage of consumers expecting future unemployment to rise increases as share prices drop. Consumers’ expectations about unemployment have deteriorated over the past few months. In August 2011, four out of every ten Dutch consumers expected a rise in unemployment.

AEX index and consumers’ expectations about future unemployment

AEX index and consumers’ expectations about future unemployment

Karin van der Ven en Pauline Sijrier-Goettsch