DEBATE: As consumer spending falls, should we be concerned about the immediate threat of recession?
Rising import prices have inflicted several consecutive months of negative real wage growth on the UK consumer. With consumption the dominant engine in an economy, given its recent growth, this is obviously a problem. Nonetheless, the question of whether a recession is imminent hinges on just how much consumption will fall as UK consumers struggle to digest this temporary bout of higher inflation. For the economy at large, there may be some offsetting factors – credit remains cheap and plentiful, household wealth is still rising and the employment backdrop remains robust for now. Meanwhile the burgeoning economic recovery being experienced by the world outside the UK may help paper over some of those domestic cracks through exports and investment. Nonetheless, the horizon is clearly darkening for the UK economy, ironically at just the same moment as it is brightening markedly for our oft-derided European neighbours.
The UK was expected to dip into recession at the end of 2016, yet it ended the year as the fast growing of the G7 countries. There are understandable reasons for fall in consumer spending, uncertainty around Brexit is no doubt having some impact on confidence. The rise in inflation, which is outstripping wage raises, has put pressure on household incomes. However, inflation appears to have peaked, which will give households the time they need to adapt, and confidence to return. The fact remains the UK economy continues to grow, unemployment is very low and the global economy is at its healthiest since the financial crisis began. Interest rates remain low and technology is making it easier for households to shop around for a bargain. Predicting a recession is more common than recessions actually are, at present this is merely a blip and the UK will return to growth as it benefits from a weaker pound.