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:
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.
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.
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.
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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Hello again my friends, it’s time for another episode of “What to Trade,” this time, for the month of April. As usual, I present to you some of my most anticipated trade ideas for the month of April, according to my technical analysis style. I therefore encourage you to do your due diligence, as always, and manage your risks appropriately.
Bearish scenario: Sell below 1.0820 / 1.0841... Bullish scenario: Buy above 1.0827...
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