Why household consumption is the engine of economic resilience and its hidden risks
In short: While recent economic resilience has been driven by robust consumption, the underlying balance sheets tell a more complex story. As real wage growth fluctuates and inflation impacts purchasing power, the interplay between household savings and spending patterns remains a critical, yet delicate, component of national economic stability.
Professor Jagjit Chadha examines the evolution of asset and liability positions across the UK's household, firm, and government sectors. A central focus of modern economic discourse is the state of these balance sheets, particularly in the wake of the financial crisis and the subsequent adjustments required to maintain stability.
Recent economic resilience has been largely underpinned by consumption expenditure. This trend has been supported by robust real wage growth and an increased propensity for households to spend their income. However, this stability is not guaranteed. The Office for Budget Responsibility (OBR) has projected a 2% GDP growth for 2017, while the National Institute of Economic and Social Research estimated a likely growth of 1.7% in February.
Despite these figures, concerns remain regarding the composition of growth. Current central growth estimates sit just above 2%, which remains below what is typically considered potential growth. Furthermore, productivity—measured via income growth per head—is estimated at only 1% to 1.5%. This masks significant heterogeneity across the income distribution, meaning many families may see little to no increase in real purchasing power.
Looking forward, the depreciation-induced inflation is expected to lower real wage growth, potentially reducing household purchasing power. This economic shift could be intensified if households choose to increase their savings rates, creating a complex tension between individual financial prudence and the aggregate demand required to sustain economic output.
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Sources
- Summary by Intellect · source: Debt and the Household Balance Sheet - Professor Jagjit Chadha
- Also: Debt and the Household Balance Sheet
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