The economy is performing a little worse than previously thought, that’s the news from the third estimate of GDP in the first quarter.
The trade deficit widened, manufacturing contracted by more than expected and the quarter on quarter fall in construction output was revised down from a terrible 4.8% to an even bigger 4.9%.
Overall it added to a picture of an economy that was stagnated for around 18 months.
So where to now as the second quarter comes to an end and we await the first estimate of growth in a month’s time?
City economists are pessimistic; some expect another six months of stagnation whilst others think the economy might contract again.
I suspect that over the next year or two, watching the two charts below as they develop will prove crucial to understanding the UK economy. The data in both cases comes straight from the national accounts.
Household consumption still represents around 60% of GDP and as the ONS noted today it remains very weak. For all the much hoped for talk of ‘rebalancing’ towards investment and net exports, it’s hard to see how the economy can really grow if household consumption is falling.
The first chart shows (in real terms) the total value of real household disposable income, quarterly since 1987.
As can be seen, following a steady rise over two decades, this has been pretty stagnant since late 2007. The well-documented squeeze on living standards means that household’s real incomes have remained frozen*.
As long as real incomes aren’t growing then the only way consumption will grow is if the household savings ratio (the percentage of their incomes that they save) starts to fall. There isn’t much evidence that this is happening either.
After a steady decline from 1992 until 2008 (which resulted in continuos economic growth but set up some of our later problems) the ratio jumped in 2008 and has remained elevated.
The best case scenario would be for real incomes to start growing again so that households can increase their spending in a sustainable manner. Failing that, a decrease in the savings ratio could boost growth but would probably just stack up problems further down the line as household indebtedness increased (no one wants to see it actually turn negative again as it briefly did in 2008).
At the moment though neither looks to be happening, and given this is 60% of GDP we are talking about, I struggle to see how we can therefore generate a decent rate of growth in the near term.
*Actually the picture is even worse than this, much of the growth in real household disposable income has actually gone to households higher up the income spectrum. For many people the squeeze in real incomes dates back to 2003.