How long can consumers keep going?
How long can consumers keep going?
It has become clear that avoiding a second leg to the recession will depend on consumption, particularly in the US but also in the rest of the world, continuing to grow reasonably strongly for another year or two.
For the moment this consumption is being largely financed by increased borrowing, at least in the English-speaking world, and at some stage families will want – or at least need – to repair their balance sheets and get saving. But the longer consumption keeps on rising, the longer companies have to sort themselves out, become profitable again, get investment going, take on more labour and so on. The recovery won't really get under way until investment recovers, but meanwhile it is down to consumers. Shop till you drop.
Well, until a few days ago, things seemed reasonably relaxed. In the US, consumption was cantering along nicely and there was – and is – the prospect of a further cut in interest rates to keep it doing so. In Japan, though, the economy as a whole was still in serious recession, consumption was still just positive on a year-on-year basis. True, in Germany things were seriously depressed, but that seems to be associated with the introduction of the euro and the associated price rises (real or perceived). Eventually even the Germans will presumably be prepared to spend more. And here in Britain, while there might be some tailing off, we were still spending pretty strongly.
You can see the way growth in consumption (the red line) has been running above growth of GDP (the black line) in the US and even more notably in the UK for several years. Household debt as a percentage of GDP is even higher in Britain than in the US. In Japan consumers have had a pretty miserable time through the late 1990s but at the moment are helping, rather than hindering, the economy. Only in Germany is lack of consumption a serious problem.
Taken together, these four countries account for 57 per cent of world GDP, and about 60 per cent of world consumption. In the short term they determine what happens to world demand.
There is a danger that things might deteriorate quite suddenly. The latest consumer confidence figures from the States, from the Conference Board, show it dipping to a nine-month low. At last it seems that the jobless nature of the recovery is starting to rattle people. If you are still in a job, you are probably fine, but if you lose it, it may take a while to find another.
Now these are just figures for confidence: what people say, not what they do. Last autumn consumer confidence was savagely hit by the 11 September attacks but as it turned out, people kept buying. Car sales, in particular, were very strong. So it is possible that this is another false alarm. But actual sales seem to be weakening a bit too, so keep fingers crossed.
Japan? Well, yesterday the Japanese authorities had yet another package to try and boost the economy. You don't want to know the details because there is nothing substantial: there is a tiny tax cut, the formation of an agency to prop up bust companies, and some new legal requirements on banks. But the big thing that has to be tackled – the fact that the banking system is bankrupt – has yet again been pushed aside. I have lost count how many there have been in the past ten years but there is no sign that this will be any more effective than its predecessors.
Given this, it is very hard to see any reason why Japanese consumers should spend more. Already Japan imports less than the UK (did you know the UK is the world's third largest importer, after the US and Germany?). So the best that can be hoped for is that Japan will not become a further drag on the world economy, not that its consumers will revert to anything like their late 1980s euphoria.
Germany is even more disturbing. I have just been reading the influential IFO Institute's verdict on the new government's programme. This is how it starts.
"Germany has been on the wrong track for thirty years. The government's share in GDP has risen from 39 per cent to 48 per cent. Unemployment has increased from 150,000 (West Germany) to about four million. These factors are connected, and a reversal of trends is not in sight for either. The most recent proposals of the Federal Government will take the country even further down the wrong track, since what is euphemistically designated as a 'savings programme' is in fact a massive ten point tax increase programme."
And us? I may be wrong, and there is nothing much in the figures yet to support this view, but I have a feeling that our great consumer boom may be drawing to its close. There are several tiny signs, particularly in London and the South-east.
The London economy is now losing jobs and it has often been a bell-wether for the rest of the economy. House prices are falling at the top end of the scale and that too has often translated into falling prices further down.
Worse, we have some big tax increases coming through next year, with National Insurance going up for both employees and employers. We don't yet know the effect the latter will have on employment but it would be astounding if some jobs were not lost as a direct result. Until now, the job market has been amazingly strong and consumers' willingness to borrow has been justified by the fact that if people lose a job they can find another. But that could tip.
As a general rule in economics, things take longer than you expect to happen and then when they do, they happen more suddenly. If people suddenly feel ripped off by the rise in taxation, they could get ugly. Londoners will face the tax next February for driving into the centre of the city. That is a great way to encourage them to spend money in central London shops and restaurants. No one, after all, can force people to spend money if they don't want to.
The authorities will respond to consumer weakness by cutting interest rates. That could happen very soon. It is quite possible that we will get a cut from the Federal Reserve, the Bank of England and the European Central Bank next month. Then there will be a few weeks of nail-biting to see whether rate cuts work. If they were really clever, these three main central banks, plus the Bank of Japan, would co-ordinate the cut in rates for maximum impact. But I don't think they are frightened enough to co-operate in this way. Yet.
Meanwhile, watch the shops and the restaurants. Are they still busy? Count the estate agents' boards. Are there more "for sale" signs going up? Can you get into a cinema or a theatre easily? The little signs are the things that will tell us whether the consumer boom is over. Or rather, since everything comes to an end sooner or later – not whether but when?Reuse content