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UK Economy
Consumer splurge has shaky foundations
From the Financial Times of Tue, 23 Dec 2014 19:09:54 GMT
Christmas shoppers on Oxford Street.©Charlie Bibby/FT

Consumers might be splashing out for Christmas, but they are doing it on the back of shrinking savings and disposable incomes that remain well below pre-recession levels.

That is the picture that emerges from a slew of data released by the Office for National Statistics on Tuesday, which includes the agency’s first publication of alterative measures of material economic wellbeing alongside the headline gross domestic product numbers.

The revisions to GDP show that the pace of the recovery has been slower than previously thought, with the UK economy just 2.9 per cent above its pre-recession peak, compared with 3.4 per cent before yesterday’s release.

While consumer spending shows no signs of slowing, as households increased their real spending by 0.9 per cent in the third quarter with income subdued, this expenditure was funded by reducing the proportion of income saved from 7.5 to 7 per cent.

Matt Whittaker, chief economist at the Resolution Foundation, said that while economic growth is still strong “each new data release has brought fresh disappointment in terms of wages and incomes”. The fall in savings, while “consistent with growing confidence and optimism for the future among households”, was a “strategy that cannot be sustained indefinitely”, he said.

The alternative measures of the economy confirmed that, while recovering, the UK remains a poorer country than before the recession on many metrics.

Valerie Fender, head of economic wellbeing at the ONS, said that GDP was an “incomplete measure of the state of the nation” and that she hopes that the release every quarter of six additional metrics alongside the national accounts, including GDP per head, net disposable income per head and household incomes would offer a “more rounded” view.

These measures do not provide for particularly comforting reading. GDP per head remains 1.8 per cent below the pre-crisis peak and net national disposable income, which represents the income for UK residents, is 5.6 per cent behind.

The release follows more than four years of work by the statistics body after Prime Minister David Cameron asked them to start “measuring our progress as a country not just by how our economy is growing, but by how our lives are improving”.

The ONS has already begun releasing subjective reports of how people feel about their lives, with the new metrics published yesterday offering a more objective standpoint.

Paul Allin, formerly director of the ONS’s wellbeing programme and now visiting professor at Imperial College London, said while it is clearly “full steam ahead” in the work of measuring and publishing statistics, the question remained about what policy changes would take place based on the new information.

“It’s building blocks, stepping stones, we haven’t got there yet,” he said.

Paul Hollingsworth, UK economist at consultancy Capital Economics, said that while the figures “painted a fairly discouraging picture” of household finances and on the face of it “could suggest that the recovery in consumer spending rests on shaky foundations”.

But he said he remained “optimistic” that real wages would rise next year putting the growth in spending on a sustainable basis and that the fall in the price of oil would feed through to cheaper petrol, thus offering an “immediate boost” to discretionary spending power.

Another disappointment for policy makers came in the business investment data with the rate of decline in the third quarter doubling from the previous estimate to 1.4 per cent.

Howard Archer, chief UK economist at IHS Global Insight, said while the “worrying marked relapse” might just be “companies taking a breather after very strong growth over the previous four quarters, it may also be a sign that companies are adopting a more cautious approach in the face of increased global growth concerns (particularly weakness in the eurozone) and mounting political uncertainty in the UK as the 2015 general election looms”.

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