The Phoney Recovery

5th Dec, 2014

At the beginning of this year consumers across Europe were beginning to feel optimistic about the economy for the first time in a long while.

This optimism was undoubtedly catalysed by positive noises from national Governments as the lines began to go in the right direction on the graphs – in the UK, the total size of the UK economy finally reached its pre-recession peak, prompting George Osborne to boast in his budget of the fastest GDP growth rates in the G7. Consumers sensed the economic mood music was changing, and in March 39% of people surveyed for YouGov expected the national economy to improve in the year ahead.

This positive outlook carried into the summer, with consumers feeling less constrained by financial pressures and happy to increase their discretionary spending. The Greene King Leisure Spend Tracker – produced with Trajectory – shows leisure spending in July rose by 12% on June.

But come the autumn, this rosy mood was beginning to evaporate. While the growth at national level has continued, consumers themselves feel no better off at home. Spending has stalled, and even optimism about the still-growing national economy is waning – a YouGov poll this week (carried out just before the Chancellor’s Autumn Statement) found that the proportion of people expecting the economy to improve had fallen to 25% (from that 39% figure in March).

In many ways, this embryonic recovery is a reminder of the first part of the downturn in 2008-9.  Both were announced with vaulted political and economic rhetoric, and both have taken – or are taking – some time to filter through to consumers. This initial period of the downturn had a limited effect beyond banks and businesses, but accelerated consumer trends in value hunting, mercurial consumption and discretionary thrift – in many cases driven by a desire to save money, rather than a need to.

With consumers still feeling the impact of the downturn on their household budgets, and the cost of living likely to be a key electoral battleground over the next 6 months, how long it takes people to feel the recovery will have a significant impact on the longevity of those trends. The optimistic summer offers evidence of a desire to return to spending – especially on out of home leisure – but concerns about the viability of the recovery are acting as a brake on this.

In addition, the simplicity of this narrative is questioned by the increasing presence of polarisation in different parts of the market. The gap in confidence and expectation between those in the public sector (who are facing years of cuts and frozen wages) and those in the private sector (who are feeling the most optimistic), for example, is growing and – with George Osborne’s announcement of cuts set to reduce public spending to 1930s levels – is likely to grow further as the recovery benefits some but not others.

Beyond this consumer narrative the recovery itself is not as clear cut as some of the political rhetoric would have us believe. In suggesting that the BBC had been ‘hyperbolic’ in its reporting of the Autumn Statement George Osborne perhaps forgot to take into account the OBR and IFS’s response to the plans – the latter of which imagined the £55bn worth of cuts that are still to come as a fundamental ‘reimagining of the role of the state.’ Elsewhere, significant questions remain about the deficit – with one article in the national press today suggesting that in order for the deficit reduction plans to add up, consumer  borrowing would have to rise by £360bn – which would take household debt (as a share of total household income) to 55% by 2020 (up from 44% before the recession). All this is without mentioning – as no one seems to be – that eventually interest rates will have to rise, having been held at 0.5% for 5 years.

And beyond this national picture, it is important to remember the global direction of travel. As the Geneva Report of the World Economy announced earlier this year, Global debt has risen over the past few years, from 174% of GDP in 2008 to 212% in 2014.

Despite the ups and downs of recovery and spending at national and regional levels, it seems that little has changed on a global basis, and we are now confronted with the paradox of state prudence being supported by consumer profligacy.