Collect data and relevant literature on UK household consumption since 1950, and discuss the following: the importance and role of consumption to the UK economy; identify periods of recession and discuss the role and size of consumption pre- and post-recession. How does this compare to the size and role of investment?
Since 1950s United Kingdom has experienced a number of recessions. All of them were different, yet they all had the same factor in common: changes in consumption and investment. This essay will display the importance and role of consumption and investment in the UK economy. It will recognize the periods of recessions in the UK since the 1950s, and analyse the three most recent recessions. It will present the data in regard to GDP, consumption, unemployment, and investment. This essay will also study the consumer behaviours during the recession periods, as well as how the recession affects investment.
Consumption is an important economic factor as it is the main driver of aggregate demand. Consumption means using commodities and services until the satisfaction of our wants is met. From an economic point of view consumption can be divided into direct (final consumption)- where the consumer is the final recipient of the good or service, or indirect (productive consumption)- where good or service is used to produce other goods or services. The importance of consumption is defined as the reason for all economic activities. Without the “want” factor, producers would not have the reason to produce certain goods or services. Consumption also stimulates the market. Some goods are produced only for the period of time, as the consumer preferences may change or his expectations toward the product will grow. Manufacturers, who are trying to lower the cost of production to increase the profit, are aware of the fact, that the profit maximisation focus is not always the best way for expansion. Consumption is not only price related, but at the same time, it is the quality. Better quality for a better price pushes the manufacturers to be more innovative. In an open market the local producers are aware that if they set the price too high, the consumer will buy a cheaper imported product, which have a similar quality. Consumption stimulates the market and is closely correlated with investment. Investment is also a component of Aggregate Demand and therefore, influences the rate of economic growth and the productive capacity of the economy. Investment means expenditure on capital spending, for example, the firm can use the profit to make an investment and buy a new machinery to increase production. However, without consumers consumption of the firm`s product, there will be no profit, furthermore, the firm will be unable to make an investment and supply the quantities demanded by the customer, as well as create new jobs. The economy is growing, and well-being of the nationals increases. However, when a recession occurs, the relation consumption- investment is disturbed and becomes unbalanced, and as a consequence, has the negative effects on the economy.
Recessions since 1950s:
· 1956 recession
· 1961 recession
· Mid-1970s recessions
· Early 1980s recession
· Early 1990s recession
· Great Recession (2008-2009)
Until first post-war recession in 1956 (British Motor recession), the economy has experienced a great expansion (boom), and till late 1970s the UK had nearly full employment. Also, the national debt started to gradually decrease. The consumption was increasing along with the dynamic economic growth as well as post-war migration.
The UK expenditure patterns between 1954 and 1994 show, that consumption expenditure has more than doubled. The GDP during that time also displays a similar growth. Following this concept, we could assume that increasing economic consumption increases well-being in the long run. Before 1954, the food consumption was one of the slowest growing, as a result of the disappearance of post-war food rationing. The opposite- the fastest consumption growing was noticed in recreation and entertainment. Nevertheless, the history shows that the well-being of the nationals may be strongly affected by fall in GDP. When the GDP falls, the businesses go down, people are losing jobs and they are spending less money, as well as public sector borrowing rise (Jackson & Marks, 1999).
Consumption of the households is the largest part of total expenditure, and it has an important role in regard to GDP movements.
The magnitude of the falls in household consumption was very similar in the last three UK`s recessions. Between 1979 and 1980, household consumption depreciated by 4.8%. The early 1990s recession resulted in fall in household consumption by 3.3 % from 1990 to 1992. The latest recession effects showed the highest drop of 5% in household consumption between 2008 and 2009. When the second oil price shock occurred in a decade and the price of oil doubled in 1979, it triggered a high inflation in the world economies, which forced the Bank of England to narrow the monetary policies. The most recent downturn was higher than the previous two as the share of the household consumption is rising gradually in the total expenditure. The early 1990s recession was more reflective of domestic than global economic problems as interest rates were raised to control inflation and as a result of changes in house prices (Chamberlin, 2010).
Pre-recession “Aggregate consumption data from the Office of National Statistics (ONS) show that household spending was growth at an annual rate of 3.5% per year in the decade running up to the crisis before collapsing in 2008” (Kovacs et al., 2016). The global economic crisis of 2007–09 had its origins in a credit crisis, due to an unprecedented period of excessive borrowing, excessive lending, and excessive investment. Inflexible “credit standards since 2007 sharply reduced loan-to-value and loan-to-income ratios for first-time home-buyers, contributing to substantial declines in house and other asset prices from historic highs” (Aron et al., 2012). This recession supposed to have a long-lasting effect on household consumption, because this was a severe recession, which was supervened by a sharp fiscal contraction. As a result, of which the real earnings and income distribution capacity would fall (Brewer, et al., 2013).
“Recession tends to encourage caution, introversion, fear, anxiety and a concentration on securing the essentials in life.” (Flatters, 2010).
Kovacs et al. (2016) indicate, what the post-recession 2008-2009 period has meant for the households. Their studies present four definitions: a negative shock to income, growing uncertainty around future income, a reduction in the supply of credit, and finally a decline in house prices. During the recession and in post-recession time households tend to save more because of the uncertainty of the future. Furthermore, the households with the mortgages had to cut more on consumption comparing to households with no mortgage.
The recessions tend to have a massive impact on unemployment. Between 1979 and 1984 unemployment increased from 5.3% to 11.9% and during that time the number of jobs decreased by 2 million. The recession in the 1990s caused another downturn in employment which changed from 6.9% to 10.7% in 1993 and reached the number of 3 million. The last recession in regard to unemployment was less severe, as from 5.2% in 2008 increased to 8% in 2010, and the number of jobs falls only by 1 million. The growing unemployment also had the influence on people consumption behaviour. After the deregulation on the financial market in the 1980s, the nation has learnt that consumer credit is not always available and therefore gradually started to increase their savings ratio.
From 1988 to 1992 the household saving ratio changed from 3.3 % to 12.2 % and from 2008 to 2009 it rose from -0.9 % to 8.5 %. The availability of consumer credit during those periods decreased by 62% and 13.3% accordingly. Also, the bankruptcies during that time occurred more often.
In the 1980s recession, to lower the inflation, Bank of England has changed its base rates to over 10%. The same steps were implemented to fight the recession in the 1990s. In 1990 the base rate reached 13.9%, however at the beginning of 1993, when the economy was improving, the rate fall to 6%. The last recession in 2008 started with the base rate of 5.25% and was dramatically minimised to 0.5% by March 2009 (Chamberlin, 2010).
Recessions also caused disturbances in the investment market. Businesses were not sure about future demand level, so they would rather hold back on further investments. Nevertheless, if they were confident enough about running the investment regardless of the recession, they were often constraint by the deficit of available credit finance. The profits of the business generally fall, as a result of lower demand, and therefore sales. The output of the business decreases, what causes the diminishing capacity utilisation, which means the cost of the production of a unit increases. The business at this point is looking for a solution to lower the cost. The reduction of costs often means cutting the jobs, which deepens the unemployment.
During the recession of the 1980s, fixed investment spending decreased by 16.3% from 1979 to 1981, and between 1989 and 1992 fall by 13.9%. The recession between 2007 and 2009 was even more severe as the investment declined by 23.3%. Thus, the business uncertainty over the future economic prospects and limited availability of finance, has a great influence on capital spending and future investments. The fear of going bankrupt due to recession pushed many businesses to withdraw from the market and others to slow down their development (Chamberlin, 2010).
Throughout the years UK`s economy experienced a number of recessions. Some of them were more severe than others. We could assume then, that the economy can learn from its mistakes, however, the history proves that the causes of the recessions, are not always internal. The global economy has a great impact on single economies. Thus, it is crucial for the single economy to prepare for the unfortunate events during the good times. Therefore, the government should improve on forecasting. There is a close relationship between consumption and investment. Consumption is the promoter in every activity within the economy, and investment is one of them. Both consumption and investment lie on the aggregate demand line, which reflects the country`s economic growth. Still, even the fiercely growing economy, can be affected by the recession. Recession can distract the economy for the long years and may lead to the collapse of the systems.
ARON, J., DUCA, J. V., MUELLBAUER, J., MURATA, K. and MURPHY, A., 2012. CREDIT, HOUSING COLLATERAL, AND CONSUMPTION: EVIDENCE FROM JAPAN, THE U.K., AND THE U.S. Review of Income and Wealth, 58(3), pp.397–423.
Brewer, M., Browne, J., Hood, A., Joyce, R., & Sibieta, L., 2013. The Short? and Medium?Term Impacts of the Recession on the UK Income Distribution *. Fiscal Studies, 34(2), pp.179–201.
Chamberlin, G., 2010. Output and expenditure in the last three UK recessions. Economic & Labour Market Review, 4(8), pp.51–64.
Jackson & Marks, 1999. Consumption, sustainable welfare and human needs—with reference to UK expenditure patterns between 1954 and 1994. Ecological Economics, 28(3), pp.421–441.
Kovacs, A., Rostom, M., Bunn, P., 2016. Debt and Consumption in The United Kingdom After the Crisis online. Available from: https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=RESConf2017&paper_id=904 Accessed 11th December 2017.
Office for National Statistics, 2017. Business investment online. Available from: www.ons.gov.uk Accessed: 10th December 2017.
Office for National Statistics, 2017. Gross Domestic Product online. Available from: www.ons.gov.uk Accessed: 10th December 2017.
Office for National Statistics, 2017. Total national household final consumption annual growth online. Available from: www.ons.gov.uk Accessed: 10th December 2017.
Office for National Statistics, 2017. Unemployment rate online. Available from: www.ons.gov.uk Accessed: 10th December 2017.