Getting real…?
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Despite continuing problems in the financial sector, UK consumers are defying the odds and doing what they know best - shopping.
Latest news from the high street shows that spending in February rose by 1% in February. Analysts had expected a fall of 0.2%.
The article from the BBC concludes:
“February’s surprising sharp jump in retail sales, if taken at face value, suggests that a consumer slowdown hasn’t even begun yet,” said Vicky Redwood, an economist at Capital Economics.
“It’s hard to see what is keeping consumers spending. Yet these figures suggest that they certainly are, boosting the chances that the Bank of England’s Monetary Policy Committee will hold on to May before cutting interest rates again.”
But surely the tightening of credit in the financial sector must have some impact on the real economy? Here are my three reasons to be gloomy....
1. The mortgage marketBoth existing and new borrowers now face tighter criteria when they apply for remortgages or new loans. With the days of the ‘six times joint income’ multipliers over for most, this must have a dowward effect on the prices buyers are able to pay for housing.
2. The housing market
Rising house prices have fuelled a ‘wealth effect’ boom in recent years but as banks tighten lending and struggle to find the credit to provide loans, without this positive impact on spending it is inevitable that consumption will have to move closer in line with incomes in the coming months.
3. The stock market
Another dampening impact on spending must arise from the slump in share prices. Households typically hold wealth in housing and shares (including stock options and pension funds) and both these sectors are suffering at the moment.
Now for the good news.... we have already seen that retail sales are showing little sign of decline, but unemployment is falling too. Latest data shows that both measures of unemployment showed a fall in February and average earnings rose at an annual rate of 3.7%. This helps, perhaps, to explain the 2.5% inflation rate in the UK at present.
However, inflation can be both a sign of strong growth and confidence or a cause for concern in itself. Recent inflationary trends are linked to higher energy, fuel and food prices. This means that (combined with rising mortgage costs) the typical UK consumer faces the prospect of having less money left over for the fun things in life: holidays, clothes and consumer durables.
Economists use the ‘R’ word with caution: even talk of recession can be enough to dampen confidence, and slowdown and even declines in real incomes become reality.
For the UK, it’s all about the ‘D’ word now: demand.
Or should it be denial?
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Unit 2 Macro: Cyclical and Structural Economic Issues Facing the UK [23 May 2012]
Unit 3 Micro: Game Theory and Business Economics [21 May 2012]
Unit 2 Macro: Positive and Negative Multiplier Effects [20 May 2012]
Unit 2 Macro: The Importance of Productivity [20 May 2012]
Unit 2 Macro: Measuring Inflation in the UK [20 May 2012]
Unit 2 Macro: Real Interest Rates [20 May 2012]
Q&A: What do we need to know about output gaps? [20 May 2012]
Unit 2 Macro: The Output Gap [20 May 2012]
Revision notes on unemployment [20 May 2012]
Unit 1 Micro: Revision Presentation on the Price Mechanism [16 May 2012]
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Unit 1 Micro: Revision on Rice Prices [13 May 2012]
Unit 1 Micro: Price Elasticity of Supply [13 May 2012]
Unit 2 Macro: Revision Notes on Supply-side Policies [10 May 2012]
Unit 1 Micro: Revision Blogs on Markets and Intervention [10 May 2012]
Unit 1 Micro: Revision Quiz and Game on Market Prices [10 May 2012]
Unit 2 Macro: Monetary Policy and Inflation Glossary [5 May 2012]
Unit 2 Macro: Trade and Balance of Payments Glossary [5 May 2012]
Unit 2 Macro: Unemployment Glossary [5 May 2012]
Unit 2 Macro: Economic Cycle Glossary [5 May 2012]
Unit 2 Macro: Aggregate Demand Glossary [5 May 2012]
Macro Revision - Key Statistics on the UK Economy [4 May 2012]
Unit 1 Micro: Climate Change Policies - Finding the Right Mix [30 Apr 2012]
Unit 1 Micro: Using the Cost-Benefit Principle [30 Apr 2012]
Macro Revision: Putting Things in Context [29 Apr 2012]
Unit 2 Macro: Britain back in Recession [29 Apr 2012]
Unit 4 Macro: The Euro Zone Crisis (Revision) [22 Apr 2012]
Unit 3 Micro: Revision on Contestable Markets [8 Apr 2012]
Unit 2 Macro: How the Economic Cycle affects Businesses [6 Apr 2012]
Unit 3 Micro: Revision on Scale Economies and MES [5 Apr 2012]
Unit 1 Micro: Revision on Price Elasticity of Supply [5 Apr 2012]
Unit 1 Micro: Revision on Elasticity of Demand (for Rice) [3 Apr 2012]
Unit 1 Micro: The Collapsing Price of Carbon [3 Apr 2012]
Unit 1 Micro: Revision on Producer Subsidies [2 Apr 2012]
Unit 2 Macro: Revision on Real Economic Data [2 Apr 2012]
Unit 2 Macro: Revision on Real Disposable Income [2 Apr 2012]
Unit 3 Micro: Revision on Scale Economies, Technology and Prices [1 Apr 2012]
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Unit 1 Micro: Revision on Producer Cartels [31 Mar 2012]
Unit 2 Macro: Revision on Index Numbers [31 Mar 2012]
Unit 2 Macro: Revision on Capital Investment [30 Mar 2012]
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Intergenerational Equity - Fairness and the Slump [28 Mar 2012]
Life in the Slow Lane - UK Growth in 2011 Lags the Euro Area [28 Mar 2012]
George Buckley at the Millfield Economics Society [28 Mar 2012]
Unit 4 Macro: Evaluating 3 Years of Quantitative Easing [27 Mar 2012]
Unit 1 Micro: The Tax on Beer [16 Mar 2012]
Unit 1 Micro: Inequality - The Rise of Fuel Poverty [15 Mar 2012]
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Unit 1 Micro: Breaking Down the Cost of Gas [4 Mar 2012]
Unit 2 Macro: Might Oil Prices Bring another Recession? [4 Mar 2012]
Economies hooked on central bank stimulants? [4 Mar 2012]
Unit 4 Macro: King on the UK Economy [15 Feb 2012]
Martin Wolf on Global Shocks [10 Feb 2012]
Unit 2 Macro: Focus on China - Inflation [26 Jan 2012]
Unit 2 Macro: Focus on China - Per Capita Incomes [26 Jan 2012]
Unit 4 Macro: Money, Debt and the New World Order [22 Jan 2012]
Unit 2 Macro: Look Upwards to Find the next Downturn [15 Jan 2012]
Unit 4 Macro: Economics of Fiscal Deficit Reduction [12 Jan 2012]
Unit 2 Macro: Factors Driving Business Investment [10 Jan 2012]
Hopes and Fears 2012 [10 Jan 2012]
Unit 4 Macro: Natural Disasters and their Economic Impact [7 Jan 2012]
Unit 1 Micro: Low Cost Airlines Beat the Recession [1 Jan 2012]
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2011 in Review - The US Economy [27 Dec 2011]
Unit 2 Macro: The UK Housing Market in 2011 [26 Dec 2011]
Unit 3 Micro: Sub Normal Profits - BP Leaves the Solar Industry [21 Dec 2011]
Unit 3 Micro: Oligopoly and Duopoly in Bus Markets [20 Dec 2011]
Unit 4 Macro: The Rise in Self Employment [17 Dec 2011]
Unit 4 Macro: Does UK Manufacturing have a Future? [30 Nov 2011]
Unit 3 Micro: Tacit Collusion in the Supermarket [27 Nov 2011]
Unit 1 Micro: 50 Years since the end of the Max Wage in Football [23 Nov 2011]
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Pasty Prices - Something to Chew Over [19 Nov 2011]
AS Macro: The State of British Business [13 Nov 2011]
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Unit 3 Micro: Impulses to Change Management Models [5 Nov 2011]
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Unit 3 Micro: Ofcom gives stamp of approval for flexible pricing in mail [21 Oct 2011]
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Unit 2 Macro: Consumer Spending Charts for the UK [3 Oct 2011]
Unit 2 Macro: Homework Assignment on Consumer Spending [3 Oct 2011]
Unit 1 Micro: Homework Assignment on Market Prices [2 Oct 2011]
Unit 1 Micro: Exercise on Equilibrium Market Prices [27 Sep 2011]
Unit 1 Micro: Exercise on Market Supply [26 Sep 2011]
Unit 4 Macro: Greek Economy at Default’s Door [25 Sep 2011]
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Unit 2 Macro: Economic Growth and Inequality [14 Sep 2011]
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