Confidence is key. It’s also increasingly rare these days.
And if you want to understand why there’s been no real global economic recovery yet, you don’t need to look any further than that.
“A lot of what’s happened with Europe is a lack of global confidence in the ability of the European leaders to deal with their problems,” said Craig Alexander, chief economist at Toronto-Dominion Bank.
On the other side of the Atlantic, the main problem is a lack of confidence in American politicians to avert the approaching fiscal cliff.
“The business community recognizes that there are probably limits to what the government can do in the midst of an election, but I don’t think there’s a lot of confidence in how Washington will function after an election,” Mr. Alexander said. “It’s not clear what U.S. fiscal policy will look like.”
These concerns are holding business back from investing and hiring - two key elements of any recovery. Restoring confidence in politicians would go a long way then.
Companies are sitting on lots of cash, but it’s going unused because no one wants to act in this risk-filled economic and financial environment, Mr. Alexander said.
“[Companies are] not prepared to take big bets,” he said. “I don’t think any CEO wants to ... have to go to his or her board of directors and say, ‘I made a mistake,’ because the board will look at them and say, ‘Why were you making a big bet in this high-risk environment?’”
This confidence problem may be what eventually spurs the U.S. Federal Reserve into another round of stimulus in September, Mr. Alexander said.
Weak job creation figures over the next month combined with continued sluggish economic growth, both of which are a reflection of poor business confidence, may force the central bank to act. On Wednesday, the Federal Reserve announced no new plans for monetary easing, but hinted that more stimulus may be in the cards soon.
But investors and businesses need to be cognizant of the fact that central banks on their own can’t do much, Mr. Alexander said.
“The reality is, the Fed can’t actually materially affect what’s happening to job creation and economic growth.”
If central banks actions inspire confidence, then that would be the most positive outcome, because confidence would in turn give executives the guts to spend money and take on new hires.