Readers Question. 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?

Consumer spending will continue to be squeezed in 2009. Various factors are causing consumer spending to fall at the moment.

Falling House prices. Houses are the biggest form of wealth in the UK. As house prices fall, consumers lose confidence and can no longer remortgage to gain equity withdrawal. With mortgage lending continuing to be tight house prices are likely to fall further in 2009. Therefore, this will be a big drag on consumer spending.

Cost Push Inflation. Inflation is forecast to peak at around 5% before starting to fall next year. Despite the increase in costs, wage inflation has remained low. This means,

• living standards have been squeezed reducing consumer spending
• It will help reduce inflation next year.

Rising Unemployment.

The slowdown in the economy and rising unemployment will be a big factor in reducing consumer spending. Some predict unemployment will reach 2 million by Christmas time. Even the fear of unemployment may be sufficient to reduce spending.

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National Statistics online has had a well overdue make over. The new web design takes up the whole screen and is easier to navigate and read. It also comes with RSS feed which is useful

For any economist, National Statistics Online is a very useful resource for finding latest data and statistics and understanding some of the changes which occur. It includes a broad snapshot of the economy, with the main economic indicators.

• Economic Growth
• Inflation
• Balance of Payments
• Unemployment
• Productivity
• Consumer spending

It is an excellent site for an A Level student to visit and try and understand.

There are also interesting statistics on population and social demographics which might influence economic trends.

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Readers Comment It is shocking to me that revenues from all my future income tax and even my young children’s future tax payments have already been committed by our national debt. If it is not some kind of nefarious carve-up, why would the UK wage 2 unnecessary wars costing billions when we do not have the money.

debt is a burden on the future, a gamble on increasing growth and prosperity how can that mesh with a rapidly expanding population on a small delicate planet with finite resources?

We are borrowing the money for these wars, and paying interest to private entities !!
Am I right saying that the BofE sells and buys bonds when it wants more cash?

• If the government needs to borrow money then the Bank of England sells government-backed bonds to the private sector. This is how the government raises revenue. When the government has a budget surplus it can buy back more bonds than it sells.

Government Debt

• Government borrowing does create a burden on the future Future Taxpayers will have to pay debt interest plus the debt. (Interestingly, the current payments on debt interest payments are equivalent to total spending on defence.)
• The Benefit of borrowing now is that current taxpayers benefit from lower tax rates (than they should be) and/or higher government spending. Borrowing can be beneficial if it is invested in improving long term productive capacity of the economy.
• The problem is that reducing national debt now would exacerbate the economic downturn. e.g. higher taxes would reduce consumer spending and lead to slower growth.
• The government predicted (hoped) continual economic growth would keep national debt manageable, but, the economic slowdown means National debt will increase by more than they expected.
• You could argue the government have wasted the last 15 years of economic growth. This would have been a good time to keep reducing national debt as a % of GDP, rather than allow it to rise. (from 29% of GDP in 2003 to 40% now)

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Readers Question: I understand why, generally, low inflation is considered to be a good thing and why high inflation is bad particularly if you have savings whose value in real terms then diminishes faster.

What I do not understand is why inflation is not in fact a good thing for those of us in their late 30s, saddled with a huge mortgage, two kids, and no savings to speak of. Surely once I have bought a house for £x, what I really want is for the cost of it (which is of course fixed when I hand over the purchase price – this is nothing to do with what happens to the VALUE of the property in future since that only has an impact if I ever sell) in real terms to drop as quickly as possible, so that the cost of borrowing to fund it becomes a smaller part of my income as quickly as possible?

To give an extreme example, my parents bought their first house in 1964. They paid about £1500. This felt like a fortune at the time, but they could probably get an overdraft to refinance it now, if they had only ever had an interest only mortgage! And the interest payments themselves, though a struggle in 1964, would be a quite trivial amount relative to their income now.

So surely if inflation hits 10% (I know that is unlikely, but let’s just say, for the sake of argument), and since I do not propose to move again, then the cost of my house (which remains thus static at what I paid for it) IN REAL TERMS will drop faster so that, assuming my salary at least keeps up with inflation, I’m going to be better off than if the £300,000 I paid still “feels” like £300,000 in 10 years’ time?

Thanks for the question. You raise a good point. Inflation is generally considered to be a damaging thing for the economy. There are many costs of inflation such as uncertainty, declining competitiveness, menu costs. For full explanation see: Costs of inflation. However, although inflation is generally bad, there are some people who will benefit from inflation (as long as nominal wages rise faster than inflation)

If you keep money under your bed, inflation will reduce the value of your savings. But, if you borrow a fixed amount, inflation makes it much easier to pay back (assuming wages keep pace with inflation, which generally they do in OECD economies)

When people are considering whether to buy or rent, they often forget the importance of inflation. They look at the cost of mortgage payments and focus on how expensive they are. But, these mortgage payments historically, decline in real terms over the course of the mortgage.

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