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Osborne is relying on consumer-led growth, but will it materialise?


8:55 am - March 22nd 2012

by Duncan Weldon    


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I noted yesterday afternoon that whilst the Office of Budget Responsibility had made few changes to its headline growth forecasts it has changed the expected composition of that growth by quite a lot more.

The Government is very keen on talking up exports and investment but by the OBR’s estimates the UK’s recovery will actually be dependent upon the consumer.

But how likely is it this scenario will materialise?

The chart below shows the OBR’s growth forecasts for 2012 to 2016 split into two categories only: private consumption & everything else.

As can be seen private consumption will is expected to be a crucial driver of Britain’s growth in the years ahead.

Previously forecast
What is perhaps more interesting, is to compare the chart above to the one below – which shows the same data but uses the OBR’s previous forecasts, taken from the Autumn Statement in November.

Not only is consumption a major factor in the OBR’s growth forecasts but its importance is increasing.

Back in November the OBR expected 12.5% of all growth in 2012 to come from private consumption, they have now revised that up to 37.5%.

Indeed over the next 5 years to 2016 , the OBR now expect over half of all growth to come from private consumption.

In 4 of the next 5 years the OBR thinks that consumption will add more to GDP than net trade, whilst consumption is a more important driver of growth than business investment in every year of the forecast.

For all the government’s talk of export and/or business investment-led recoveries, the forecasts now suggest they are banking on a return to consumer-led growth.

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About the author
Duncan is a regular contributor. He has worked as an economist at the Bank of England, in fund management and at the Labour Party. He is a Senior Policy Officer at the TUC’s Economic and Social Affairs Department.
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Reader comments


The people receiving the biggest bonuses from the budget are the richest who are the best dodgers and spend a higher proportion their income abroad – your average worker and pensioner spends almost all their income in the Uk

I suspect these projections about where the growth in aggregate demand is likely to come from are probably correct.

One likely reason is that the banks are much more comfortable about advancing credit to consumers than making new loans to SMEs because the default risks of consumer loans are usually lower.

So just to be clear then: we have a right-wing government that refutes the whole idea that growth is primarily a function of the increased consumer demand you get when ordinary people are in secure work and on decent incomes, and is basing its policies on the opposing principle that growth is primarily a function of deregulation, low business taxes, low wages etc.

Yet meanwhile, the organisation tasked with producing independent forecasts of economic growth on behalf of the government is basing those forecasts on the assumption that government policies are going to drive rapid growth in consumer demand over the next few years.

*sigh*

4. Luis Enrique

I don’t suppose the OBR has made these changes simply because recent data shows they had previously under estimated consumer spending?

5. gastro george

Expecting credit-driven private expenditure to rise at a time of falling incomes is either incorrect or will lead to the popping of the next bubble.

As Luis @ 4 says, it looks like growth forecasts have been changed with relation to consumer spending on the basis of data. Not because of some holistic change in view.

8. Luis Enrique

GO,

yeah, I saw that right after typing that comment!

however, I still imagine that most likely the OBR has adjusted its forecasts simply because they have updated the data being entered into their models (why else would they have done it? either a change to the model itself or, less likely imho, some sort of political pressure to massage up the forecasts)

Gastro George: “Expecting credit-driven private expenditure to rise at a time of falling incomes is either incorrect or will lead to the popping of the next bubble.”

Money GDP is expected to grow, albeit at a very modest growth rate. The banks evidently still regard consumer credit as a better business proposition from their perspective than lending to SMEs. This is presumably why Osborne is making much of £20bn for a National Loan Guarantee Scheme announced in the budget to promote bank lending to the SME sector:
http://www.bbc.co.uk/news/business-17473599

By official sources (November 2010):

There were an estimated 4.8 million1 private sector enterprises in the UK at the start of 2009, an increase of 51,0002 (1.1 per cent) since the start of 2008.

These enterprises employed an estimated 22.8 million people, and had an estimated combined annual turnover of £3,200 billion.

Small and medium-sized enterprises (SMEs) together accounted for 99.9 per cent of all enterprises, 59.8 per cent of private sector employment and 49.0 per cent of private sector turnover.

@ Luis

I didn’t really mean to suggest that the OBR have revised their forecasts for consumer demand upwards in light of policy announcements made in the budget. Rather than “the assumption that government policies are going to drive rapid growth in consumer demand”, maybe I should have said “the assumption that government policies are going to be *consistent with* rapid growth in consumer demand”.

I suppose my thinking was that the only policies consistent with such growth, in the present climate, are going to be policies that *do* actively drive such growth; that growth is not going to ‘just happen’ if the government is focused on other things. Hence it seems strange that the OBR is pencilling in growing consumer demand while the government is focused on the supply side.

(Well – not that strange, I guess. Presumably the OBR is assuming that the money being handed to wealthy individuals and businesses will quickly trickle down to consumers’ pockets and so stimulate demand. But even that highly questionable assumption doesn’t seem to mesh with the government’s seeming acceptance that real incomes are going to keep falling, unemployment is going to remain high, etc.)

11. gastro george

@Bob B
Insouciance in the face of rising credit-driven expenditure was a characteristic of the last crash.

@GO
It would be shorter to say that their models don’t work.

@11 gastro george: “Insouciance in the face of rising credit-driven expenditure was a characteristic of the last crash.”

Some (costly) recent lessons have been learned from over-lax regulation of the terms and volume of bank loans. The banks now have more onerous capital requirements and we are not threatened by the prospect of an imminent asset-price bubble. Average house prices seem to be falling almost everywhere except London. Retail sales volumes were down in February by 0.8pc.

For the present, we needn’t worry about more credit-driven expenditure and should welcome banking loans to SMEs to finance business investment and working capital for expansions.


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    Osborne is relying on consumer-led growth, but will it materialise? http://t.co/mVnboCIa

  2. Edd S.

    RT @libcon: Osborne is relying on consumer-led growth, but will it materialise? http://t.co/aR9rrR1X/ NOPE.

  3. sunny hundal

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  4. Patron Press - #P2

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  5. Qian Yu

    It turns out Osborne is relying on consumer spending for UK recovery. Tories – say goodbye to growth and 2015 election! http://t.co/2QoIgLei

  6. Viki

    It turns out Osborne is relying on consumer spending for UK recovery. Tories – say goodbye to growth and 2015 election! http://t.co/2QoIgLei

  7. sean

    It turns out Osborne is relying on consumer spending for UK recovery. Tories – say goodbye to growth and 2015 election! http://t.co/2QoIgLei

  8. Christopher John

    It turns out Osborne is relying on consumer spending for UK recovery. Tories – say goodbye to growth and 2015 election! http://t.co/2QoIgLei

  9. sunny hundal

    More significantly – this also means Osborne is slowly giving up on an export or business led recovery http://t.co/2QoIgLei #noplanforjobs

  10. AC

    More significantly – this also means Osborne is slowly giving up on an export or business led recovery http://t.co/2QoIgLei #noplanforjobs

  11. simon thomas dean

    More significantly – this also means Osborne is slowly giving up on an export or business led recovery http://t.co/2QoIgLei #noplanforjobs

  12. Paul Stead

    Consumer led growth? *groans* http://t.co/LDKFXpfk

  13. Claire Hutchins

    More significantly – this also means Osborne is slowly giving up on an export or business led recovery http://t.co/2QoIgLei #noplanforjobs

  14. Jason Brickley

    Osborne is relying on consumer-led growth, but will it materialise? http://t.co/DtzdYVcT

  15. leftlinks

    Liberal Conspiracy – Osborne is relying on consumer-led growth, but will it materialise? http://t.co/E9mSjx6D

  16. paulgriffithsuk

    It turns out Osborne is relying on consumer spending for UK recovery. Tories – say goodbye to growth and 2015 election! http://t.co/2QoIgLei

  17. raincoat optimism

    Osborne is relying on consumer-led growth, but will it materialise? | Liberal Conspiracy http://t.co/lQfO3gPZ via @libcon

  18. Gods & Monsters

    It turns out Osborne is relying on consumer spending for UK recovery. Tories – say goodbye to growth and 2015 election! http://t.co/2QoIgLei

  19. Gods & Monsters

    More significantly – this also means Osborne is slowly giving up on an export or business led recovery http://t.co/2QoIgLei #noplanforjobs

  20. Irfan Oomer

    It turns out Osborne is relying on consumer spending for UK recovery. Tories – say goodbye to growth and 2015 election! http://t.co/2QoIgLei

  21. seuss

    More significantly – this also means Osborne is slowly giving up on an export or business led recovery http://t.co/2QoIgLei #noplanforjobs

  22. seuss

    It turns out Osborne is relying on consumer spending for UK recovery. Tories – say goodbye to growth and 2015 election! http://t.co/2QoIgLei

  23. Coz Hyatt

    It turns out Osborne is relying on consumer spending for UK recovery. Tories – say goodbye to growth and 2015 election! http://t.co/2QoIgLei

  24. Coz Hyatt

    More significantly – this also means Osborne is slowly giving up on an export or business led recovery http://t.co/2QoIgLei #noplanforjobs

  25. Pucci D

    Retail sales down again last month = NO RT @libcon: Osborne is relying on consumer-led growth, but will it materialise? http://t.co/vS7Bp2u2

  26. representingthemambo

    Osborne is relying on consumer-led growth, but will it materialise? | Liberal Conspiracy http://t.co/tDLbgd3d via @libcon

  27. Cath Hancox

    It turns out Osborne is relying on consumer spending for UK recovery. Tories – say goodbye to growth and 2015 election! http://t.co/2QoIgLei

  28. Lynne Jones

    It turns out Osborne is relying on consumer spending for UK recovery. Tories – say goodbye to growth and 2015 election! http://t.co/2QoIgLei

  29. Lynne Jones

    More significantly – this also means Osborne is slowly giving up on an export or business led recovery http://t.co/2QoIgLei #noplanforjobs

  30. Daniel Pitt

    Osborne is relying on consumer-led growth, but will it materialise? http://t.co/HArb936J #Tories #economy #austerity #Osbornomics





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