Consumption is by far the largest component of Aggregate Demand. Around two-thirds of the total. Therefore rising consumer confidence will be good news for the economy as it struggles out of the double dip of this recession.
Consumers have been shell shocked since 2009. Real income is down due to low wage rises and inflation which is higher than the wage rises (in the public sector and some industries wages have been frozen or even fallen in money terms). Also the uncertainty associated with the recession, the Eurozone crisis and government cuts has led to a higher savings rate.
Currently the economy needs short-run growth desperately. Just using up more of the idle resources of the economy will help a lot. Output and employment will rise and there is then a good chance that a sustainable rate of growth will emerge. Households spending more will allow this to happen.
So the news from Visa that shoppers have spent more in September (around 3%) is great news. One swallow does not make a summer, but it really is a good sign.
The BBC report the figures and speculate on whether the economy has really turned the corner here.
Interesting that consumer spending is on the up according to Visa's figures of September's consumption, but why is that the case? Have the government put forward any real short run policies which have influenced this increase in demand and consumption. Either way, it is too early to know whether this was a one off increase or a consistency because it has only been a month, and the government should wait a little longer before deciding on policies such as the £4b investment plan that Ed Balls has suggested. This is because the economy may not be as bad as everyone seems to be suggesting in government.
ReplyDeleteSurely the increase in consumer spending is because of the short-term stimulus provided by the Olympics. With people's bills rising and the continuation of the squeeze on living standards, it makes it hard to believe that consumer spending is actually going up permanently.
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