This is all because expectations about technological advances are associated with higher wealth in the future. Hearing about new technology makes us feel wealthier in the present and – as in the above example of a future pay rise – leads to higher spending, even before the tech is available. This is in line with existing findings that anticipated shocks or changes to the economy – those that are expected because of earlier news or announcements – are more likely to cause business cycle fluctuations than unanticipated shocks to productivity.
Admittedly, we still need to develop a better understanding of the many dimensions that lead to adjustments of expectations in light of news, as well as the effect on the economy. It is too early to pin down all of the economic forces at play during the COVID-19 recession, for example, but the research discussed above suggests that positive technology news may have dampened a severe COVID-19 recession and partly fuelled an initial economic recovery after the pandemic. The tech developments we were hearing about at the time ranged from the development of mRNA vaccines to efficiencies gained from video conferencing and online collaboration software.
Anticipating interest rate rises
The finding that our expectations about future technologies are an important factor that drives booms and recessions could also be applied to other kinds of new information. After all, it is not only news about future technologies that affects business cycles, these days commodity prices, central bank rate decisions and inflationary developments are among the many news items that shape our expectations of the future. Thinking about these issues affects our daily economic decisions, which has an important effect on the overall economy.
When central banks announce their intention to increase interest rates – as the European Central Bank recently signalled it will do in July and the Bank of England has announced already – high street banks start preparing to increase interest rates on mortgages and loans, as well as savings. So, upon hearing the news of a likely future rate hike, homeowners with mortgages often immediately start to consider switching to a lower fixed rate with a longer maturity. They may also start to move their money out of the stock market into savings products more directly linked to rising interest rates.
Central banks anticipate that higher rates will provoke a reduction in demand for goods and services, as people save more and pay more towards their mortgages and loans. They know this could lower future inflation – a key aim in the present economic environment. In this way, news about future interest rate changes not only affects the economy at present, but also triggers changes in people’s expectations, affecting the future economy as well.
