A common view is that the UK economy is weak because “consumers aren’t spending”; a view often paired with the conclusion that, as Tim Harford says:
… who is going to do the spending when consumers start trying to save up? Krugman says it will have to be governments.
Leaving aside the question of why aggregate spending is undesirably low, this argument is somewhat misplaced, at least in the UK context.
The remarkable aspect of the UK household consumption data should be obvious from the following graph, which compares nominal household consumption spending with the corresponding volume measure (i.e. the measured quantity of goods and services purchased):
(This analysis comes with a metric boat-load of caveats. We can’t extrapolate from one sector – albeit a large one at 60% of GDP by expenditure – to the aggregates. “Spending” can mean consumption or investment, and I am looking only at consumption here.)
Caveats in place, this picture is not simply a lack of consumer spending, but in large part a failure of the supply side. UK households in 2012 Q1 are not measurably better off than in 2005 Q1, in terms of volume of goods and services consumed, for a 23% increase in spending over that period.
As Tyler Cowen notes, it is unsatisfactory to blame the 2008 Sterling devaluation for this. When imports became expensive, we should expect a boost to domestic production and substitution away from those imports. That does not seem to have happened.
I think the view of many would be to blame the banking system for failing to reallocate capital towards this this end. Can it really be that simple? The country home to the City of London is struggling to efficiently allocate capital? (Nick Rowe has just put up an interesting post on this very topic.)
I am no way susbscribing to demand denial, but it would be useful to at least attempt to understand some of the apparent supply-side failures present in the UK GDP data, and think about what policy implications they have.