Fragile consumer led recovery

Fragile consumer-led recovery

With a growth slowdown in the UK export market, it is becoming more evident recovery will be consumer-led. But with the squeeze on incomes and prolonged stagnant wages, spending will be funded by higher consumer debt and reduced levels of savings.

Popular TV dramas Downton Abbey and Peaky Blinders are both set in the period after World War I. Although these are fictional, critics say they are a fairly true reflection of the period.

Life “downstairs” in a large country house portrayed in Downton would have involved hard work, long hours and poor pay. But conditions endured by those staff must have paled into insignificance compared with Small Heath, Birmingham in the 1920’s – the setting of Peaky Blinders. Here is a highly industrial area where there is a brutal culture of gangland warfare as well as abject poverty and appalling living conditions.

Social mobility – the ability to “better” yourself – was virtually non-existent. If you were born poor, you worked hard and died poor. Fortunately opportunities to move up the social ladder have improved since then. Following World War II, social mobility improved progressively but halted and has steadily deteriorated since the 1980’s. Rising inequality – the gap between “haves” and “have-nots” – has increased between 2000 -2014 in the UK according to a recent Credit Suisse report.

Inequality breeds social unrest, perhaps this is a factor behind recent “Britain needs a Pay Rise” marches, organised by TUC. The unions argue that ordinary people are facing the biggest squeeze on their incomes for over a hundred years.

So why would the employers’ organisation, the CBI, also be keen to see wages rise? Their July publication, “Making Britain work for everyone” acknowledged average real-terms pay is 7% lower than before the recession. It is also 20% behind where it would have been if the economy had continued to grow on pre-recession trends. Quite clearly consumers’ spending power has reduced.

With a growth slowdown in UK export markets, it is becoming more evident recovery will be consumer-led. But with the squeeze on incomes and prolonged stagnant wages, spending will be funded by higher consumer debt and reduced levels of savings.

Whilst wage increases fuel consumer demand, the CBI report argues pay rises must be underpinned by increased productivity. Improvements in productivity depend on a variety of factors – capital investment on up-to-date plant and equipment by companies, flexibility by workforces, the existence of good training regimes and rewarding staff by providing opportunities to progress and benefit linked to the companies’ fortunes.

Household debt has quadrupled since 1990 resulting in many people worrying about bankruptcy or losing their home. There are workable ways of dealing with these situations – far more than existed in Edwardian Britain.

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