UK Economy in Focus: Consumer Spending and Saving

In this revision note and video we look at some of the key factors that influence the level and growth of consumer spending.

Consumer spending on goods and services is the biggest component of aggregate demand

AD = C+I+G+ (X-M)

In 2021:

C = £1376 billion

GDP = £2199 billion

Therefore, C = 62.6% of GDP

Key factors affecting consumer spending

1. Real disposable income
2. Household wealth including house prices
3. Unemployment / job security
4. Interest rates paid on loans and savings
5. Availability of credit finance
6. Consumer confidence / animal spirits

In 2020 – consumer spending fell by 10%

In 2021 – consumer spending rose by 6%

Slowdown is expected in 2022 – with spending forecast to rise by just 2%

There is a risk of a consumer-recession

What might cause a consumer-recession?

• Bank of England is now raising monetary policy interest rates
• Wages are rising less quickly than prices leading to a fall in real incomes for people in work (inflation 9%, wages rising 5%)
• The real value of state welfare benefits is declining
• Effective disposable income is being hit by the huge rises in the energy price cap (note recent government interventions here to soften the blow)
• Higher direct taxes (income tax allowances frozen + increase in national insurance)
• Sharp fall in consumer confidence / sentiment