How long can the British consumer keep it up? The boost from the public sector is waning and company investment remains depressed. We know the former will continue to slacken, even if present public spending plans are sustained, and the investment intention surveys suggest the latter will, if anything, weaken. Exports may help a bit but to judge by the latest trade figures they, too, are disappointingly weak.
So the burden of maintaining demand is down to consumers. It is as simple as that. There are all sorts of reasons to expect they will ease back. These range from the rising concern about unemployment, which has been climbing albeit from a low base for nine months, to a need to service a mountain of debt and if possible rebuild savings. But what we don't know is whether consumers are facing a bit of a squeeze or something more serious.
Yet that matters enormously. It is the difference between reasonable overall economic growth and a serious slowdown. It is the difference between public finances scrambling through in adequate shape or another year where the Chancellor misses his targets by a wide margin. So what can sensibly be expected?
A good place to begin is the Bank of England's latest assessment of the economy, as revealed in the minutes of the Monetary Policy Committee, which have just been published. The gist of these is that the economy is growing reasonably close to its trend rate; that the higher energy prices have not led to a take-off in prices more generally; and that while there are some downside risks on the growth front these are small. The Bank, more questionably, also thinks there is some sign of a rebalancing of demand away from consumption and towards net exports.
It is a good steady-as-she-goes portrait, which if it proves right will justify no change in interest rates for several months. The Monetary Policy Committee will have succeeded in engineering a "soft landing" from the property-fuelled consumption boom.
So where are the risks? The best analysis I have seen on this comes from Chris Watling at Longview Economics, from whom the graphs are taken. His call runs like this.
Growth in consumer spending, in real terms and nominal terms, will run below trend this year: below 2 per cent. This is the result of minimal employment growth, slow growth in wages and slow growth of borrowings. This sombre picture is further affected by the increase in the price of things and services people are obliged to pay, including energy and taxes. In addition consumers want, or at least say they want, to increase their savings.
Two points here seem to me to be most interesting. One is the distinction between actual spending and discretionary spending. If the price of petrol goes up, you have to pay it. I suppose given time you could switch to a diesel car or buy a smaller one. But in the short run there is nothing much to be done. Ditto taxes. Ditto mortgages. Ditto odds and ends such as parking fines, which, however careful you are, are almost impossible to avoid nowadays. Even leaving such little matters as fines aside, Longview Economics calculates that inflation in these non-discretionary items will increase by 6.8 per cent this year.
So while inflation on paper remains very low, in practice for most people, it is material. If you look at real discretionary disposable income - ie what people have left to spend after paying all the bills they have to pay - this has fallen to below 2 per cent and may well fall further. The graph on the left shows how it was at its peak in the 2001 general election. On the best case calculated by Longview Economics it recovers a bit, but this assumes that people will carry on extracting equity from their homes by remortgaging and carry on increasing their other borrowings. On more realistic assumptions discretionary income will continue to fall and on the more pessimistic assumptions it will fall to about 1 per cent a year.
The other intriguing feature is people's desire to rebuild savings. The second graph shows this is at its highest level since the end of 1997, just after Labour came to power. Of course this is what people say they want to do, and so far there has been only the smallest increase in household savings. But wanting to save is a necessary precondition for saving and it would make sense after the borrowing boom for people to want to pause a while.
If this analysis is right, and I find it pretty plausible, consumption will grow at substantially less than 2 per cent this year. That would actually be in line with the forecast of 1.5 per cent growth in consumption in the Budget, but the risks surely seem now to be further on the downside than at the time of the Budget. Energy prices are higher for a start.
You then say, if consumption, which is nearly 70 per cent of GDP, grows at well below 2 per cent, is it realistic to expect the economy as a whole to grow by 2.5 per cent? Well, maybe. But it will not feel a heady time, a far cry from the growth in their living standards that people that people have been accustomed to enjoy.
The key point here is that it is very difficult to see why consumption will do better than predicted and very easy to see why it may do worse. This is not to predict disaster, more a period of continued grumpiness.
This is important in political terms. Leave aside the forthcoming local elections because it will be very hard to discern useful national trends from these. The more important election coming up will be the one for the next leader of the Labour Party and hence for prime minister. The later that election comes, the more the office of chancellor will be associated with slow consumer growth and less with the rapidly rising living standards of the 1998-2003 period.
This will become an interesting test of what people really want. Do they want to carry on shopping? Or are they happy to see a period of marking time, paying back debts, sorting out personal finances and so on?
One thing is sure. The UK has become an economy that would find a further rise in interest rates quite alarming. People who can just about get by servicing their debts at present levels would be seriously unsettled were the next movement of rates to be up rather than down. That possibility should not be discounted, even if a move either way seems many months off.