Consumer Spending 2008 / 2009

Readers Question: i was wondering if u could give me some insight on how these macroeconomic factors will affect household consumption in 2008/2009. thanks

Consumer Spending in the UK

This graph shows the strong correlation between consumer spending and economic growth. Since 2005, consumer spending has continued to increase at an average of about 3%

consumer spending

 Factors that Will Affect Consumer Spending in 2008/09

1. Interest Rates 

With high levels of debt in the UK (see debt UK), any change in interest rate will have a big impact on consumer spending. If interest rates fall, mortgage holders will face lower mortgage payments therefore they will have more disposable income. Interest rates are forecast to fall, therefore this could maintain reasonable levels of consumers spending however:

  • due to credit crunch many banks are not passing on B of England base rate cuts to their customers.
  • The bank have hinted interest rates may not fall very much, because of rising cost push inflation.
  • Lower interest rates may not boost spending if other factors have a stronger impact in detering spending

House Prices.

Rising house prices have encouraged consumer spending in the past decade. Rising house prices encourage higher confidence and equity withdrawal through remortgaging.

equity release

This graph shows that equity withdrawal has contributed to higher consumer spending. If house prices fall then this equity withdrawal will dry up leading to lower consumer spending. Falling house prices will also have a significant bearing on consumer spending. It is uncertain how much house prices will fall by. Some people predict house price falls of 20%. But, personally I feel the shortage of supply and low interest rates will keep house prices fairly stagnant. (house prices continue to fall)

3. Difficulty of Borrowing.

The credit crunch is making it more difficult to borrow money. E.g. number of mortgages on offer is falling. 125% and some 100% mortgages have been removed. However, I don’t think this will be a major effect on consumer spending. It is not as dramatic as the media make out and most people don’t rely on 125% mortgages to finance their spending. More significant is the fact many banks are trying to increase their profit margins, meaning interest rate cuts are not being passed on.

4. Wages

Wage inflation remains relatively subdued, especially in the public sector. This will help limit consumer spending as consumers will not be increasing spending by borrowing more. Minimum wage is to be increased in line with inflation

5. Price of Oil / Food / Council tax

Increase in the price of commodities will tend to increase the cost of living for many people leading to lower discretionary income and will limit consumer spending to some extent.

Predictions Consumer Spending and Economic Growth 2008/09

I would expect consumer spending to slow down by the end of 2008 to about 1.5%. I think the MPC will be reluctant to cut rates, they would rather have lower spending than allow inflation to increase. I also think the housing market is particularly significant for UK consumer spending and whilst that remains in the doldrums consumer spending growth will remain weak. However, at the moment, I do not see the UK entering a recession.

Sources

10 thoughts on “Consumer Spending 2008 / 2009”

  1. This is fascinating. Could you give any more information on how you think consumer buying habits will be affected by the credit crunch moving into 2009. Obviously people are spending less nowadays and tightening their purse strings. Will this continue into 2009? Will we see the birth of a new type of savvy consumer who knows what supermarket to go to at any given time to get the best deals, who used to shop at Waitrose and is by 2009 a fully fledged Aldi advocate? Will people still be staying in instead of going out or will we rise out of this bump and return to life just as it was before the doom and gloom headlines hit the media?

  2. I’m interested in what Zoe is getting at…

    In terms of consumer spending on luxury goods do you think that consumers will spend less over the coming year or possibly longer.

    I saw a story on the news yesterday indicating that sales for entertainment (namely watching films) have actually increased for this quarter against 2008.

    Will people spend their lesser disposable income on ‘having fun’ or do you think that this will alter as the recession continues?

    Also is there any reason for this bar the logic of ‘enjoy the present’ because the future’s bleak.

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  4. i m so simple person but too ambitious i just only want to know the correct form of consumer behaviour.

    i don’t have money because i m unemployed student, but still i want to know how to spend the money in correct manner with the help of this business celebirty because it may help me in my futher future.

  5. I’ve just been informed by Birmingham Midshires that the interest rate has fallen. My fixed term ended on 1/2/10 but they told me my reduced payments will not start until April due to ‘mortgage payments being one month in arrears and they have to give me 30 days notice’!!. This sounds complete crap as I have been informed by a mortgage advisor that it should start from 02/2/10. My first mortgage payment was 08/02/07 and was fixed for 3 years, so it doesn’t make any sense. Am I being fobbed off and if so how can I make them pay me the money I’m owed?

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  9. How Quaint,

    This web discussion ok place before the sudden demise of Lehmans. And then all Hell.

    Did the last comment about there not being a recession on the way

    Economics and Voodoo!!! How to tell the difference?

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