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We're paying for previous excesses of the last boom


Consumers are spending more than last year

Consumers are spending more than last year

Chris Ison

Consumers are spending more than last year

Alost decade? It is a nasty prospect but one that you hear repeated a great deal in recent days on both sides of the Atlantic... the idea that we in the developed world are in some way condemned to a longish period of relative economic failure.

It was implicit in the tone of the World Economic Outlook published last week by the IMF and on a domestic level by the suggestions here that UK spare capacity might be much smaller than previously estimated and that our long-term growth prospects might also be lower too. Not good.

It is serious concern because hanging over the experience of all of us is what happened to Japan after its great credit binge of the 1980s. There are obvious parallels and uncomfortable ones. Japan seemed to run out of policy options, with zero interest rates and a huge fiscal deficit both failing to boost the economy, rather as seems to be happening in much of the developed world now. The lack-lustre response to the latest effort by the Federal Reserve to nudge down long-term interest rates there is pretty ominous and I don't think there are many people in the world who believe that there is any room for indebted countries such as the UK or US to try to borrow yet more.

Indeed, these recent suggestions that the UK might have a £5bn boost from the Government makes the basic point. In an economy of some £1.5tn, that is a rounding error. The idea that it could make any difference either way is absurd. There may be a bit of nipping and tucking but Western nations have pretty much run out of policy options. These concerns, it should be noted, would exist irrespective of the turmoil across the Channel. The rigidities imposed by the existence of the euro do make adjustment harder but the problems of slow growth and debt would exist anyway. The "blame it all on Greece" line makes no sense. So what can be done?

Well, the first point to make is that despite everything there is the prospect of global growth, rapid growth in the case of the emerging world and slower growth for the rest of us. The divergence of performance existed before the downturn and will continue after it. The issue is how might developed countries share a little more in the growth that is around.

The second point is private consumption for the developed world, taken as a whole, is still positive, though it may well taper off next year. Here in Britain consumption is just about square year on year and it would be positive if we had been a bit better at controlling inflation. Our consumers are spending nearly 5% more in cash terms than they did a year ago. Problem is that prices have gone up by that and more. There is no shortage of a desire to consume, something that does not seem to apply to Japan.

And third, remember that adjustments are being made.

Household debt has shot up in both the US and to an astounding extent in the UK, so that both have higher levels now than even Japan. But families in both countries have started to plug away at cutting debt. There is, of course, a long way to go.

All this says is that the growth phase of this cycle will be characterised by the need to pay off the excesses of the last boom - excesses by us as individuals as well as by the Government on our behalf. What it does not say is that productive capacity has suddenly dipped too.

That is a separate debate, though obviously if productive capacity is lower the scope for recovery is lower too, and therefore the slog of getting debts to an acceptable level is correspondingly tougher.

Household debt has shot up in both the US and UK so both have higher levels now than even Japan