Where is demand going to come from?
Two sets of data published today are troubling, because they confirm the low level of demand in the economy. Private consumption accounts for about two thirds of GDP and today’s Markit Household Finance Index is in a terrible condition.
In October, just 7 per cent of households said their finances had improved since September, with 37 per cent saying they had got worse. All income groups and regions said things had got worse and the results for respondents’ expectations of how things were likely to be a year from now were the worst since the survey began in February 2009. 63 per cent of public sector workers expect their finances to get worse over the next 12 months, with just 17 per cent expecting an improvement. There is a sign of deflationary pressures, with respondents saying their debts had got higher for the seventh month in a row:
the longest continuous period in the survey’s history. Only those in the highest income group (over £58,000 per year) saw an overall decline in debt.
Respondents said their savings were being used up (32 per cent reported a decline, 6 per cent an increase) and 16 per cent reported increased need for unsecured credit (just 5 per cent a reduction.) With interest rates low, this is bearable, but if rates start to rise again the pressure will be unbearable for many families.
The other worrying data were also published by Markit, their Flash Eurozone Purchasing Managers’ Index. The Eurozone accounts for 43 per cent of UK exports (in 2009, calculated from the 2009 Pink Book) and the outlook is turning bleak. The Index is at its lowest level since the recession, new orders fell for the third month in succession and backlogs of outstanding business for the fourth month in a row.
It’s important to be clear what these figures do and don’t show. They don’t show that the Eurozone is responsible for the way the British economy has been stagnating for the past 9 months – the decline is too recent for that. But they do show that hopes for an export-led recovery owe more to faith than evidence; and the decision to drain public sector demand away looks less and less sensible.