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Are We Heading For A Triple Dip

The British economy shrank by 0.3% in the last quarter of 2012, leading economists to predict a 'triple dip' recession. It was not so long ago that the government were denying even a double dip recession was coming, so this looks like especially troubling news.

The British economy shrank by 0.3% in the last quarter of 2012, leading economists to predict a 'triple dip' recession. It was not so long ago that the government were denying even a double dip recession was coming, so this looks like especially troubling news. According to the Office for National Statistics, a drop in manufacturing output wiped out a small rally in the construction industry. Overall, 2012 was a year of zero growth. The pound dropped against other key currencies on the news and fears re-emerged that the UK could lose the Chancellor's prized AAA credit rating.

 
These statistics highlight one of the conundrums of the current economic troubles. The fact is that we have an economy that is hugely dependent on consumer spending. Back in 2011, David Cameron planned to tell the Conservative Party conference that consumers needed to pay down their credit card debt and get back to saving instead. He was forced to quickly rewrite that speech as bodies like the British Retail Consortium pointed out what a devastating effect such advice could have on the High Street. If people stop spending, the economy starts shrinking. It really is that simple. 
 
That is why the drop in manufacturing is so telling. Very few people make major purchases, like buying cars, in cash. In fact around 70% of new cars are bought using a finance product of some sort, such as personal contract hire, personal contract purchase or car loans. When people don't have access to such finance then they cannot buy a car. Sales then plummet and manufacturing quickly drops. These purchases are usually voluntary to some extent. That means that they can be postponed or cancelled altogether. When the country's consumers start to make such decisions, manufacturing and retail suffer and for an economy so dependent on consumer spending that is bad news.
 
How important is consumer spending in the UK? The answer might surprise you. The government might talk about the importance of this or that industry to the economy but any industry they mention is simply dwarfed by household spending. In 1980 consumer spending made up around 58% of GDP and by the late 2000s that figure was heading towards 70%. It seems then that two things need to happen to stop this triple dip recession biting. Firstly people have to feel secure enough in their jobs to consider major purchases. Secondly they have to have access to credit products. Then we can look forward again to growth.

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