Although every recession is different (for example in terms of length and magnitude), they do tend to have a few things in common. The focus of this blog is on consumer income and how it is affected in the aftermath of (or even during) a recession. According to data from the ONS, real national income per head has fallen by more than 13% since the start of 2008.
This latest data from the Office of National Statistics shows that in the aftermath of the 2008 recession, UK incomes have fallen by much more than they did in the 2 previous recessions experienced in the UK (click here for a PowerPoint of the chart). We would normally expect consumer incomes to fall during and possibly directly after a recession, as national output falls and confidence tends to be and remain low. However, the crucial thing to consider with falling consumer incomes is how it affects purchasing power. If my income is cut by 50%, but prices fall by 80%, then I’m actually better off in terms of my purchasing power.
The data from the ONS is all about purchasing power and shows how UK consumer incomes have fallen at the same time as inflation having been relatively high. It is the combination of these two variables that has been ‘eating into the value of the cash that people were earning’. Comparing the incomes in the four years after the 2008 recession with similar periods following the early 1980s and 1990s recession, the ONS has shown that this most recent recession had a much larger effect on consumer well-being. Part of this may be due to the rapid growth in incomes prior to the start of the credit crunch.
It’s not just the working population that has seen their incomes fall since 2008 – the retired population has also seen a decline in income and according to a report from the Institute for Fiscal Studies, it is the wealthiest portion of older households that have taken the largest hit since 2007. According to the IFS, the average person over 50 has experienced a fall in their gross wealth of about 10%, or close to £60,000. Of course for these older households, the concern is whether they will be able to make up this lost wealth before they retire. The concern for everyone is how long until incomes and purchasing power increase back to pre-crisis levels. The following articles consider this latest data on economic well-being and the impact the recession has had.
UK wellbeing still below financial crisis levels Guardian, Larry Elliott and Randeep Ramesh (23/10/12)
National income per head ‘down 13% in four years’ BBC Newsd (23/10/12)
Financial crisis hits UK retirement income Financial Times, Norma Cohen (23/10/12)
Over 50s ‘left £160,000 out of pocket by the financial crisis’ The Telegraph, James Kirkup (23/10/12)
Those near retirement in UK hit hard by crisis Wall Street Journal, Paul Hannon (23/10/12)
Living standards down 13pc since start of recession The Telegraph (23/10/12)
Questions
- Why is net national income per head said to be the best measure of economic well-being?
- Why is it so important to take into account inflation when measuring wellbeing?
- What explanation can be given for the larger fall in consumer incomes following the 2008 recession relative to the previous 2 recessions?
- According to data from the IFS, the richest portion of older households have suffered the most in terms of lost wealth. Why is this the case?
- What is meant by purchasing power?
- GDP has fallen by about 7%, whereas national income per head, taking inflation into account is down by over 13%. What is the explanation for these 2 different figures?
- How can recessions differ from each other? Think about the length, the magnitude of each.
- Is GDP a good measure of economic well-being? Are there any other ways we can measure it?
With the winter fast approaching, consumers have already begun to stock up on warmer clothes. This has contributed towards consumer spending increasing faster in September than it has in the past 3 years. According to Visa Europe’s UK expenditure index, sales in August increased by 1.2pc, but in September they rose month-on-month by 3pc.
But whilst sales on the high-street increased, sales on-line and over the telephone declined. It seems that the recent decrease in temperature is just what the retail sector ordered, as people took to the high streets.
Furthermore, recent improvements in consumer income, together with lower inflation and rising employment have all contributed towards a growth in spending. However, as consumer confidence remains at a relatively low level, it is unlikely that the winter will bring much of a change to growth in the economy. The Chief Economist at Markit said:
However, consumer confidence remains historically low as uncertainty about the economy and job security persists, suggesting that the bounce in spending seen in the third quarter could be as good as it gets for the foreseeable future.
Although the lower temperature has caused a boost in consumption, once people have made their ‘investment’ in warmer clothes, retail spending may once again decline. Hence the above comment by Markit, which suggests that further sustained increases in consumer spending may still be some way off.
The following few articles look at the latest data on retail spending.
UK consumer spending ‘rose in September’ BBC News (5/10/12)
Consumer spending increases by 3pc The Telegraph (5/10/12)
Consumer spending increases by 3% The Press Association (5/10/12)
UK retail sales: what the analysts say Guardian (20/9/12)
Online sales and wet weather boost John Lewis Scotsman, Peter Ranscombe (5/10/12)
Questions
- Which factors typically affect consumer spending?
- Using a diagram, illustrate the impact of this increase in consumption on national output and the price level.
- Is it possible that a multiplier effect may occur with the August and September rise in retail sales?
- Why is consumer confidence remaining low? Which components of aggregate demand does it affect?
- Explain why (a) lower inflation, (b) the colder weather and (c) rising employment have caused consumer spending to rise.
The housing market is crucial in any economy, as it provides so many jobs in related industries. It is frequently a good signal of how buoyant the economy is. With recession in the UK, mortgage rationing continuing and many homeowners having to find 20% deposits to buy a house, many would expect the housing market to be showing signs of trouble.
And to some extent this is the case. Studies on house prices have clearly shown how unpredictable this market is and prices remain 0.7% below what they were a year ago. However, in August house prices increased, recording their biggest rise in two and a half years, at 1.3%. For many, this rise was a surprise, but came as a welcome relief following the declines in previous months. Despite this rise, analysts have suggested that this trend is unlikely to continue throughout the rest of the year, as the demand for houses remains weak. Robert Gardner, the Chief Economist at Nationwide said:
“Given the difficult economic backdrop, the extent of the rebound in August is a little surprising. However, we should never read too much into one month’s data, especially since monthly price changes have been impacted by a number of one-off factors this year, such as the ending of the stamp duty holiday for first time buyers’.
So, what is behind this upward trend? Nationwide’s Chief Economist says that it could be explained by a resilient labour market, where employment has risen in recent months, despite the recession. The labour market undoubtedly has a big effect on the housing market, as mortgages do take up so a large percentage of take-home pay.
However, another key factor that affects house prices is the availability of mortgages. The Bank of England and Treasury launched the Funding for Lending Scheme at the beginning of August in a bid to make mortgages cheaper and more easily available. However, analysts suggest that the scheme is yet to have an effect. Furthermore, until deposit requirements are eased, that first step on the property ladder will remain elusive for many people. Mortgage approvals did increase slightly in July, but still remain a major barrier for the housing market to really boom.
The following articles consider this ‘surprising’ rise in house prices and the factors behind it.
Articles
House prices in ‘surprising’ jump, Nationwide says BBC News (31/8/12)
UK house prices record surprise increase Financial Times, Tanya Powley (31/8/12)
Surprise house price rise in August not indicative of market, says Nationwide The Telegraph, Emma Wall (31/8/12)
House prices in surprise rebound Independent, Vicky Shaw (31/8/12)
House prices continue to hold The Economic Voice, Jeff Taylor (31/8/12)
Mortgage approvals still subdued, Bank of England says BBC News (30/8/12)
Banks are pulling back from property – expect prices to fall Money Week, Matthew Partridge (31/8/12)
UK house prices up, as London continues surge Share Cast, Michael Miller (29/8/12)
Data
Lending to Individuals Bank of England 2012
House Price Index Land Registry 2012
UK house prices (links) Economics Network
Questions
- Use a supply and demand diagram to analyse recent trends in the housing market.
- Why is the Bank of England’s lending scheme not having the expected impact on the housing market?
- To what extent do you think the state of the housing market depends on mortgage rationing? Which other factors are likely to affect the housing market?
- In the article from the Economic Voice, the author says that house prices holding as they are is a surprise, because of relatively high inflation and the fact that wages are not keeping pace. Explain the economic thinking behind this view.
- The Chief Economist at Nationwide has said that the future of the housing market depends heavily on what happens to the labour market. Why is this the case?
- Why have mortgages been rationed and minimum deposit requirements been increased?
- Why is the housing market so important for the economy?
New data released on 25/7/12 by the Office for National Statistics showed that the UK economy shrank by a further 0.7% in the second quarter of 2012. This makes it the third quarter in a row in which GDP has fallen – and it is the steepest fall of the three. Faced with this, should the government simply maintain the status quo, or does it need to take new action?
The construction sector declined the most steeply, with construction output 5.2% down on the previous quarter, which in turn was 4.9% down on the quarter previous to that. The output of the production industries as a whole fell by 1.3% and the service sector fell by 0.1%. (For a PowerPoint of the following chart, click here.)
The immediate cause of the decline in GDP has been a decline in real aggregate demand, but the reasons for this are several. Consumer demand has fallen because of the squeeze on real wages, partly the result of low nominal pre-tax wage increases and partly the result of inflation and tax rises; the government’s austerity programme is holding back a growth in government expenditure; export growth has been constrained by a slowing down in the global economy and especially in the eurozone, the UK’s major trading partner; and investment is being held back by the pessimism of investors about recovery in the economy and difficulties in raising finance.
So what can be done about it?
Monetary policy is already being used to stimulate demand, but to little effect (see Pushing on a string. Despite record low interest rates and a large increase in narrow money through quantitative easing, broad money is falling as bank lending remains low. This is caused partly by a reluctance of banks to lend as they seek to increase their capital and liquidity ratios, and partly by a reluctance of people to borrow as individuals seek to reduce their debts and as firms are pessimistic about investing. But perhaps even more quantitative easing might go some way to stimulating lending.
Fiscal policy might seem the obvious alternative. The problem here is that the government is committed to reducing the public-sector deficit and is worried that if it eases up on this commitment, this would play badly with credit rating agencies. Indeed, on 27/7/12, Standard & Poor’s, one of the three global credit rating agencies, confirmed the UK’s triple A rating, but stated that “We could lower the ratings in particular if the pace and extent of fiscal consolidation slows beyond what we currently expect.” Nevertheless, critics of the government maintain that this is a risk worth taking.
The following articles look at the causes of the current double-dip recession, the deepest and most prolonged for over 100 years. They also look at what options are open to the government to get the economy growing again.
Articles
Britain shrinks again The Economist (25/7/12)
Shock 0.7% fall in UK GDP deepens double-dip recession Guardian, Larry Elliott (25/7/12)
UK GDP figures: expert panel verdict Guardian, Frances O’Grady, Will Hutton, Sheila Lawlor, Vicky Pryce and John Cridland (25/7/12)
GDP shock fall: UK growth in 2012 ‘inconceivable’, warn economists The Telegraph, Angela Monaghan (25/7/12)
UK recession deepens after 0.7% fall in GDP BBC News (25/7/12)
UK economy: Why is it shrinking? BBC News (25/7/12)
UK GDP: A nasty surprise and a puzzle BBC News, Stephanie Flanders (25/7/12)
Tough choices for Mr Osborne BBC News, Stephanie Flanders (26/7/12)
David Cameron in pledge to control UK’s debt Independent, Andrew Woodcock and James Tapsfield (26/7/12)
David Cameron defends economic policies BBC News (26/7/12)
The GDP number is awful – and it’s the product of the Government’s amateur policies, not the euro crisis The Telegraph, Thomas Pascoe (25/7/12)
UK recession: have we heard it all before? Guardian, Duncan Weldon (25/7/12)
US economic growth slows in second quarter BBC News (27/7/12)
GDP data trigger debate on economy Financial Times, Norma Cohen and Sarah O’Connor (25/7/12)
Does weak UK growth warrant more QE? Financial Times (25/7/12)
The recession: Osborne’s mess Guardian editorial (25/7/12)
Data
Gross Domestic Product, Preliminary Estimate, Q2 2012 ONS (25/7/12)
Preliminary Estimate of GDP – Time Series Dataset 2012 Q2 ONS (25/7/12)
Questions
- What are the causes of the deepening of the current recession in the UK?
- Search for data on other G7 countries and compare the UK’s performance with that of the other six countries (see, for example, the OECD’s StatExtracts.
- Compare the approach of George Osborne with that of Neville Chamberlain in 1932, during the Great Depression.
- Does weak UK growth warrant more quantitative easing by the Bank of England?
- To what extent can fiscal policy be used to stimulate the economy without deepening the public-sector deficit in the short term?
- What is meant by ‘crowding out’? If fiscal policy were used to stimulate demand, to what extent would this cause crowding out?
Youth unemployment has been one of the main headlines for some months, with data showing a record number of young people out of work.
As part of the government’s £1bn Youth Contract that aims to help young people back into work and help those unable to find employment, Nick Clegg has announced wage subsidies to firms hiring 18-24 year olds will be paid earlier.
Some of the costs of unemployment are obvious. For the individual who is unemployed, it means a lack of income and hence inability to buy goods and services. This then has wider implications for the economy. If people are unable to purchase goods and services, this contributes to a lower level of aggregate demand, which in times of recession, is hardly ideal.
Unemployment also means an inefficient use of resources, meaning the economy is operating below full capacity. Fewer people in work also implies lower tax revenues for the government, at the same time as higher unemployment benefit payments, contributing towards a growing budget deficit. This point is of particular concern, when it is young workers claiming benefits, as it could mean a life of dependency.
There are also some longer-term consequences, in particular for those who have been out of work for some time. They lose their skills, making it harder to find a job and this can pose costs to employers and further costs to the government through re-training. As such, government initiatives to tackle youth unemployment have never been more important.
The wage subsidies that were announced back in November will now be paid when young people have been out of work for six months, instead of nine. This initiative aims to help reduce youth unemployment in areas where it is at its worst. Twenty local authorities have been identified as priorities for the government and will benefit from this scheme. As Nick Clegg said to CBI summit:
“Three months can make all the difference. When you feel like your banging your head against a brick wall, when you live in an area where opportunities are already few and far between, another 12 weeks of rejection letters, of being cut off, of sitting at home waiting, worrying, that can seriously knock the stuffing out of you, making it extremely difficult to pick yourself up …
So jobcentres will be able to make use of the subsidy before people are referred to the Work Programme, capitalising on their links with local employers, and they’ll also intensify support, so more training, more regular coaching, spending more time with young people to knock a CV into shape or prep ahead of an interview.”
There are critics of the scheme, who argue that it is too little, too late and that it will simply displace older workers, thereby creating worse unemployment for another group. Until the economy begins to grow and confidence returns to the markets, unemployment is likely to remain a frequent headline. The following articles consider the wage subsidy and the state of unemployment in the UK.
Wage subsidy could mean more jobs Independent Online, Business Report, Pierre Heistein (14/6/12)
Wage subsidies scheme moved forward The Press Association (27/6/12)
Wage subsidy plan for young workers brought forward BBC News (27/6/12)
Wage subsidies scheme moved forward Independent, Alan Jones (27/6/12)
Nick Clegg announces extra help for jobless in 20 troublespots Guardian, Juliette Jowit (27/6/12)
Young people’s prospects have ‘nose-dived’ says report BBC News, Judith Burns (25/6/12)
Economic gap between young and old significantly worse since 2008 – study Guardian, James Ball and Helene Mulholland (25/6/12)
Questions
- Why is unemployment such a big concern for the UK economy? What is so important about youth unemployment?
- Which factors have contributed towards such high youth unemployment?
- How will the wage subsidy encourage firms to take on more young people? Think about how a rational firm behaves when choosing between 2 workers.
- Why does the wage subsidy cause concern for organisations supporting the employment of older workers?
- To what extent do you agree with the Guardian article that says that young people have borne the brunt of the recession and subsequent government cuts?
- What other things have been undertaken in a bid to reduce unemployment and stimulate the economy?
- Think about the costs of unemployment. Categorise them into costs to (a) the individual, (b) friends and family, (c) the government and (d) the economy.
