Topics: Economics, Macroeconomics, Inflation Pages: 4 (1148 words) Published: November 10, 2013
Consumer expenditure Mini Case

John Hawksworth “Opinion: Economic Trends - Saved by the consumer?”, Accountancy, London, Mar 2002 (with minor editing)

How long can the UK economy buck the global trend just because our consumers keep spending money? Have we avoided the recession that has gripped the US, Japan and Germany over the past six to 12 months or are we just postponing the day of reckoning? And are we storing up worse problems for the future as a result of rising household debt levels and a widening trade deficit?

Driving force
A good starting point is to consider what drives consumer spending. In the long run, economic research indicates a stable relationship between household spending, disposable income and wealth (all defined in real, inflation-adjusted terms). In the short term, consumer spending can move above or below this long-run 'equilibrium' as a result of temporary variations in factors such as interest rates and confidence levels, but the fundamentals tend to reassert themselves in the long run.

As regards the first of these fundamentals, real disposable income has been boosted recently by average earnings growth of around 4%-4.5% combined with low inflation and, since last April, a somewhat lower tax burden. At the same time, the latest Labour Force Survey shows a rise in total employment of around 75,000 in the three months to November.

Average earnings have moderated slightly but should still rise by an average of at least 4% in 2002, boosted by higher public sector wages. Inflation is expected to remain below the 2.5% target level this year and next. Taxes may need to rise from 2004 onwards to fund increased government spending, but probably not before then. Taking all these factors together, real disposable income growth may moderate from around 4% in 2001 to around 2.5-3% in 2002, but this still suggests reasonable consumer spending growth unless the savings ratio rises sharply. This ratio will be influenced by...
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