Essay economic

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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
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They may also feel more confident about borrowing against the value of these assets to finance big-ticket purchases of cars and household goods.

However, we need to distinguish between different types of assets and their implications for consumer spending. In general, changes in the value of liquid assets, such as cash in the bank, are likely to have more impact on spending than changes in the value of illiquid assets, such as pension funds, at least in the short to medium term. Direct household ownership of shares in the UK is still relatively low compared with institutional holdings through pension and insurance companies. This may have dampened the impact of share-price falls over the past year or two on UK consumer spending, at least relative to the US.

But house prices are likely to be more important for UK consumer spending than the stock market. This is partly because higher house prices seem to be closely related to the 'feel-good factor', even if this is not entirely rational given that you can only realise these potential capital gains by trading down. On the other hand, the possibility of borrowing against housing equity through re-mortgaging means that property is not nearly as illiquid an asset as it used to be 20 or 30 years ago, creating an important direct linkage between house prices and consumer spending. As noted above, Bank of England estimates put mortgage equity withdrawal in the

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