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A media-fuelled recession?

15 March 2013 by superlative

This blog post is a bit economics-based, sorry, but I read an interesting article in the Economist this week and it resonated with something I’ve been thinking about for a while.

The article concerns consumer spending habits in the UK, and the effect they have on our economy and GDP – in other words, on whether we are in a recession or not. A recession is usually defined as two consecutive quarters of a country’s GDP going down rather than up. I was surprised to read in the article that spending by private households accounts for a whopping 63% of the UK’s GDP, and so changes in our spending naturally have a large effect in our overall growth.

Since the beginning of the financial crisis in 2008, many people have felt (and in lots of cases are) poorer. We are also more worried about money generally, and keener to reduce the size of our debt and increase our level of savings. These are noble ambitions, as an over-reliance on debt by the country as a whole played a big part in creating the crisis. It has always been my view that, as far as is possible, it is much better to save up for something and then buy it than it is to buy it with debt and pay for it later.

The article describes how our saving rate fell from 6% in 2001 to zero in 2008 – meaning we as individuals were spending pretty much everything we earned by 2008, confident in our expectations that our incomes would continue to grow and we didn’t need to save for the future. Then came the financial crisis, and our saving rate jumped back up to 7% and has stayed that way for five years. We have been responsibly saving for a rainy day and not splashing out like we used to. In comparison with previous recessions, where spending returned to its previous level after a couple of years, this has been a much longer period of belt-tightening. What interested me is the Economist‘s assertion that if our spending rate fell back to around 4%, an extra £41billion would be released into the economy, raising GDP by 2.7% and therefore taking us well out of recession.

I found this interesting because I have often felt that the reason we are so pessimistic about the future, about the woes of the euro and the financial crisis on a global level, is that the media never shuts up telling us to be worried about it. We become paralysed by a fear that our livelihoods are threatened because we are told that this is the case, not because we are aware of it ourselves, and it is the effect that this has on our behaviour that makes the situation much, much worse.

If we were never told any news about the state of our economy, or of Europe’s, how much would we really have felt affected by the financial crisis? For me personally as a public sector worker, the answer is fairly little. The main effects have been that the administrative staff union at my institution has agreed to more modest than usual cost-of-living increases to our salaries, and the organisation has restricted recruitment, preferring to recruit internally as much as possible. My income has continued to grow though, albeit more slowly than in previous years, and on top of that I have still received an annual increment to the next salary point, as these are contractual and I get them whatever happens. I think that’s the case for quite a lot of public sector workers.

Many people have been affected more than this of course, particularly if their employer has folded completely or has had to lay people off (like my Dad, who lost his job). Some of this comes back to consumer spending though – people haven’t been buying their products, and the company can only endure a drop in income for so long before their finances fall apart. It becomes a vicious circle where individuals and companies hunker down to weather the storm, they restrict their spending and their hiring to give themselves a more secure financial base, and in doing so drag down demand even further.

More people then end up unemployed, inflating the state’s welfare bill further and making government spending more difficult, and they can’t then go out and spend lots of money because they only have benefits to live on.

Individuals, companies and banks have all been hoarding cash as much as they can to reduce their exposure to future risks; and it is this lack of confidence to spend that perpetuates the need to save. It is for this reason that some people argue that the government should borrow more so that it can spend, and help to improve confidence generally in the country and break the cycle. I don’t agree with the government borrowing more, but I can see the point of the argument.

I just feel that, if we weren’t so worried about how dire the state of our economy is, if we weren’t always being told to worry about it and that we’re in the midst of a disaster, the economy would actually be in much better shape. And this seems rather sad, rather cyclical, and rather pointless, like much of economics.

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