Outlook For UK Consumption Spending in 2009

UK’s record of ‘uninterrupted growth’ may soon come to an end. Its economy which is consumption-driven has fared badly with continuous fall in spending, when private consumption stands for 66% of UK’s GDP.

Chancellor Alistair Darling has alerted that UK economy ‘may be in the worst crisis in 60 years’

Reasons:


Diagram source: http://news.bbc.co.uk

(1) House prices continue to fall. Most Britons store their wealth in property market. With continuous fall in property prices, means a significant reduction in wealth. Situation is being made worse as most mortgage companies tighten up their lending even those big ones like Halifax, Nationwide etc to prevent further loss. This automatically triggers a lower demand for houses, thus sending its price even lower. As such consumption is adversely affected

Diagram source: http://news.bbc.co.uk/

(2) Falling pound. Pound has fallen relative to dollar & Euro. This means it will be more expensive for UK to import, thus reducing spending. Theoretically we say that this may benefit exporters, but in current situation this may not be the case. Most of UK’s trading partners are from Eurozone which have now shown obvious symptoms of recession

(3) High inflation. Inflation has hit 4.4% in July & is predicted to breach 5% soon. With slow growth in earnings rate, it means purchasing power will be squeezed. This will also result in decrease in spending

(4) Rising unemployment. Unemployment has been on the rise since the end of 2007 from 5% to 5.3% in May 2008. In figure term, it is estimated that 2 millions of people will be unemployed by year end. This will result in lower overall spending into the economy. The effect could be far worse if we also factor in the weak consume confidence

Key statistics of global economy:

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http://www.newyorkfed.org/research/global_economy/globalindicators.html