Andreas Whittam Smith: Thriftiness just adds to recessionary forces

Consumers are already behaving as if times were hard
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The Independent Online

There are two methods of establishing whether the country is in a recession or not. Either look at the figures for economic activity or observe what consumers are actually doing.

The problem with the first is that the statistics take some months to collect and analyse and may be revised later. The second way is less precise but it is in real time. And it is the latter method that leads me to conclude that March 2008, when it first became clear that consumers were changing their buying habits, will be just as important a date as was August 2007.

Last August, the failure of a small German bank signalled the start of the credit crunch. It set off a chain of events that led to the run on Northern Rock, the disclosure of huge losses by financial institutions around the world, the tightening of credit and the shrinking of funds for mortgages.

Those of us who weren't bankers looked on with amazement. But now I view that avalanche as if it were ancient history. While its malign effects will last for some time, the underlying causes have finally become well understood. But a new phenomenon could be seen last month. Consumers started to retrench. They were responding to sky-high oil prices and rising food costs, as well as to the shortage of credit and falling house values.

Consumers have suddenly become thrifty. Mintel reports that 57 per cent of British consumers have started to trim their spending habits. No wonder, seeing that it will cost the average family nearly £2,000 more than it did last year to maintain its standard of living. Nor is it any longer possible to increase borrowing to cover the gap.

The same change in buying patterns is visible across the Atlantic. An American retail consultant commented last week that the last time he saw such a significant change in consumer buying patterns was the late 1970s, when there was runaway inflation. In other words, while economists are arguing whether the US and the UK have yet entered a recession according to the accepted definitions, consumers are treating it as a reality.

They are switching their shopping from famous brands to cheaper alternatives. They go to discount stores more often. Thus in the British high street, Primark is outperforming many of its rivals. Aldi, the discount supermarket, is doing well for the same reason. Consumers are not going out to eat as much as they were. They have also become more interested in do-it-yourself solutions such as dressmaking and growing vegetables. The Sussex seed supplier Thompson & Morgan reports that sales of vegetable seeds have risen by more than 40 per cent in the last two years, and vegetables now account for almost two-thirds of its seed sales.

Each of these measures of retrenchment, small as they may be in isolation, has economic consequences. In protecting ourselves as best we can from rising energy and food costs, and the sudden absence of easily available credit, we unconsciously add to recessionary forces because of the cumulative effect of our individual actions. It is this process that has become visible recently.

Look at what is happening in the housing market. Persimmon, the UK's biggest house-builder, says that sales in the past three weeks have been down by more than a third compared with last year. It is shelving plans to develop new sites until the situation improves. That is dire news for anybody working in the building trades.

To take another example, the Bank of England's agents based around the country reported last week that spending has slowed sharply in hotels, clubs and restaurants. As catering is employment-intensive, many jobs must be at risk. Some of these will be part-time, so cutting off another line of retreat for hard pressed families looking to supplement their income. At the same time, price-comparison websites have never been so busy.

Cross the English Channel and you will find that business sentiment in Germany and France has become much more pessimistic. In the US, vehicle sales were 10 per cent down in the first three months of the year. That is a lot of cars and trucks not to be selling. Starbucks announced that "the current economic environment is the weakest in our company's history". It reported that conditions were particularly bad in California and Florida, where house prices have fallen precipitously.

Last month Americans reduced their spending on women's clothes by 4.9 per cent, on furniture by 3.1 per cent, on luxury goods by 1.3 per cent and on airline tickets by 1.1 per cent. Just as their British cousins are doing, they are behaving as if times are already hard. That's why I believe that March was the first month of the 2008-2009 recession.