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Last week, Bank of Canada Governor Mark Carney announced that the recession had ended. (BLAIR GABLE)
Last week, Bank of Canada Governor Mark Carney announced that the recession had ended. (BLAIR GABLE)

Sarah Hampson's Currency

The news may be good, but we're still wallet-shy Add to ...

I am sorry to report that not even falling in love will help most consumers start spending money in this recession.

Neither will sunny weather.

Too bad. Both are relatively common - well, love can be a bit harder to come by - and, more important, both have been found to drive consumer optimism and spending.

So what will compel us to open our wallets again during this period of mass uncertainty?

I had phoned Thomas Gilovich, a noted behavioural economist at Cornell University and co-author of Why Smart People Make Big Money Mistakes and How to Correct Them , to ask what he thought would make a recession-ravaged population start to spend money. It turns out that while Dr. Gilovich has studied some of the more irrational things that drive consumer behaviour, he sees a classic, and far more rational, tenet of psychology at play as people deliberate over whether this recession is really over.

"It's the principle of conformity," he says. "The more ambiguous the situation, the more - quite sensibly - you rely on others for cues. In general, people don't understand a complex thing like an economy very well, so you want lots of social proof: People think, 'Well, what other people are doing seems like the right thing, so I'll follow that.'"

This "cascade effect" - also known as the herd mentality - is what partly explains the severe downturn in the stock market earlier this year and the recent gains, he says, and it influences our spending behaviour too. "The contagion of pessimism" is eventually followed by a "contagion of optimism."

But can statements such as last week's forecast from the Conference Board of Canada that recovery is in sight, or Bank of Canada Governor Mark Carney's pronouncement that the recession is over, make a difference?

"It's a variety of announcements, whether it's from Statistics Canada about retail sales or from the Bank of Canada or what markets are doing that the public takes in, and all have an impact on how people feel about money and the economy," explains David Stark, vice-president, public affairs of TNS Global, custom market specialists who produce Canada's Consumer Confidence Index. The index, which reached a high of 108.9 in November, 2006, and a low of 83.0 in December last year, has been "trending upward" since the nadir. For June, the latest monthly reading available, it stood at 93.4.

Of course, it goes without saying that for the 1.6 million Canadians who are out of work, the only thing that will make them feel like spending money is a job.

"Mr. Carney may be declaring the recession over, but until people are back to work, and earning an income, I don't think that a declaration will make much difference," says Bill Waiser, a professor emeritus at the University of Saskatchewan, noting that the jobless rate climbed in June to 8.6 per cent from 8.4 a month earlier.

And what of the psychological impact of a recession that, at its worst, was being called the next Great Depression?

Who could forget the pronouncement from Harvard economic historian Niall Ferguson that "there will be blood" from violent conflict caused by the recession's magnitude? Only five months ago, it seemed the world was on the brink of collapse. The End of the World was nigh.

No one recovers easily from a severe health scare. Why should people rebound enthusiastically and confidently after the greatest financial fright of their lives?

To make matters worse, this recession was amplified by 24/7 media coverage and a cacophony of doomsday talking heads and political alarmists. Watching CNN was enough to make you want to leap from a window sill.

"I was very, very upset with one of President Obama's speeches going on and on about how this is the worst in seven decades," says Joseph Martin, a business historian at the University of Toronto's Rotman School of Management. "Even if it's the worst, it's nowhere near as bad [as the Depression]" When the current downturn is fully analyzed, "I'm not sure that it will be any worse than the recession in the early eighties," he adds.

Ironically, the fact that the worst was feared, but not realized, is actually helpful. "The image that people have in their minds of what this might be - it will be like it was in the 1930s and we're going to be lined up at a soup kitchen - didn't turn out to be true," Dr. Gilovich observes.

"Now that people have had time to see that even though the economy has been bad, you haven't seen those long lines - that in itself is reassuring."

 

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