What if the consumer abandons the economy?

Christmas could be the next victim of the credit crunch. The opening of the new Westfield shopping mall in west London - a project that has cost in excess of £1.5bn - may prove to have happened at an unfortunate time as households retrench their spending and look to rebuild their savings. But what would happen if consumption did decline at a significant rate? If consumers abandoned the economy and left more of the incremental demand to exports, government spending and investment?

The answer would be an almost guaranteed recession and a long one at that. This Wall Street Journal blog entry tracks what would have happened to GDP in the USA taking out the largest single component of aggregate demand.

“For years, consumers were the unflagging pillar of the U.S. economy, but all that changed in the third quarter. GDP would have been negative four times in that last four years if not for spending. At some 70% of GDP, consumer spending can be a major benefit, or as we’re seeing now, a major drag.”

A salient point and one we can relate to here in the UK since personal consumption as a share of national income climbed to a record high in 2007 and the first half of 2008. This is all changing although the UK national income statistics are yet to fully pick up the slowdown in household demand. News that employers predict a sharp rise in redundancies brought on by the current financial crisis will do little to lighten the prevailing mood music.

Chart consumption_gdp.ppt