Assess the likely effects of the growth in consumer expenditure on the performance of the UK economy during 2001 (15)

Consumer expenditure is still increasing at a fairly fast rate, even though the rate of increase, is slightly less than in previous years. Consumer expenditure is the largest component of AD about 65% therefore an increase in C is likely to lead to an increase in AD. This will lead to an increase in economic growth (growth was 2.2.% line 1) and maybe higher inflation.

However, despite higher consumer spending, inflation stayed low at 2%; this is because other factors affect AD. For example, the recession in manufacturing and in the Euro zone meant exports did not increase too fast. This meant that the growth in AD was sustainable and not above the long run trend rate, therefore the growth was not inflationary.

High consumer spending had a negative impact on the balance of payments current account this is because higher spending leads to an increase in imports, the UK has a high marginal propensity to import therefore the value of imports is likely to increase a lot. Also exports have not been increasing as fast because of the decline in manufacturing.

The growth in consumer expenditure has helped maintain a buoyant economy even though there have been deflationary effects such as the negative shock of 9/11 and slow growth in the Euro zone area and a decline in manufacturing. The stable economic growth has enabled the rate of unemployment to continue to fall to a rate lower than it has been since the 1970s. Also, as unemployment falls the govt borrowing should fall because they receive more tax revenue and

However, if consumer expenditure was to continue rising at a fast rate and other components of AD also increased quickly, the economy would be likely to suffer inflation because AD will increase at a faster rate than AS