From the TUC

Domestic Demand has Collapsed

17 Nov 2011, by Guest in Economics

Yesterday, amid grim news on unemployment and big cuts to the Bank of England’s growth forecasts, the Treasury published the latest round up of independent economic forecasts for the UK economy.

The big news in these forecasts was the very large upward revisions to public sector borrowing forecasts – revisions which suggest that the Government’s plan to deal with the deficit by 2015 look set to fall seriously short.

But almost as interesting, and missed in the blizzard of bad economic news yesterday, were the new forecasts for 2011 and specifically the composition of this growth.

UK domestic demand (the sum total of domestic government spending, household consumption and investment by firms) is now expected to subtract 0.6% from growth in 2011 (with is being offset by a positive contribution from net trade (exports minus imports).

By contrast the OBR, back in March, expected domestic demand to contribute 1.1% to growth (two thirds of its total estimate for 2011).

It’s worth pausing for a moment and thinking about this – the domestic UK economy is expected to contract in 2011.

Whilst the Government may be keen to blame the past year’s problems on the Eurozone the simple fact is that the cause of our weak growth has been the terrible state of the domestic  economy.

The chart below shows the annual change in domestic demand in both the UK and the Eurozone since the start of 2008.

Those looking for a reason for our horribly slow growth would be well advised to start with the domestic economy and the awful state of domestic demand.

7 Responses to Domestic Demand has Collapsed

  1. Bill Kruse
    Nov 17th 2011, 5:38 pm

    It doesn’t help pursuing a policy inevitably resulting in replacing paid workers with an endless stream of free workers from the dole queue. These people will have no purchasing power – and there’s the flaw in the government’s thinking. If everyone’s working for free or on the cheap, who has the money to buy things? Where is demand supposed to come from if no-one’s earning any money?

    BB

  2. jonathan
    Nov 17th 2011, 8:43 pm

    And this is why employment policy matters. See comments to prior posts. Domestic demand directly reflects domestic employment and production. To use the “confidence” argument, too many unemployed reduces confidence both in suppliers and consumers. Pity we can’t learn the lesson.

  3. gastro george
    Nov 18th 2011, 1:30 pm

    The “confidence” argument is the last refuge of the scoundrel. It’s implicit in this argument (which is the idea) that the lack of confidence is somehow irrational, and if only people could get over it, then the economy would be running swimmingly. So it’s us that’s to blame, not Osborne. That couldn’t be further from the truth.

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