Tuesday, August 3, 2010

Talking Ourselves into Recession

Again we have that much feared phrase returning. - The idea of 'talking ourselves into a recession.'

How Can you Talk Yourself into Recession.

Recessions are caused by falling aggregate demand (AD). The main components of AD are Consumer spending, investment and government spending. If people fear and / or expect a recession, then they tend to alter there behaviour. Firms will be reluctant to invest, banks reluctant to lend, consumers reluctant to spend. Therefore, if there is much talk and expectation of recession, then it can become self-fulfilling. People spend less, firms invest less and the recession materialises.

The July Consumer Confidence Index from GfK, NOP fell for a fifth month in a row to -22. Which paints a negative outlook for the economy.

Consumer confidence is often seen as a leading indicator for the intentions of consumer spending. This seems to suggest that the talk of austerity and public spending cuts has already influenced consumers, despite the cuts not starting until next year. The problem is that the government are keen to paint a picture of how bad the economy is - to prepare the electorate for spending cuts. But, this focus on how bad the economy is and necessity of real austerity is creating a danger of causing another recession.

With house prices showing their first fall in 6 months, it is an unfortunate turn of events.

It is hard to expect much growth through exports - growth in the EU remains sluggish and the Pound is unlikely to fall any further.

With people expecting a downturn in economic fortunes, there is likely to be a rise in savings and fall in spending. Combined with a fall in government spending, the impact may be a fall in economic growth.

The government and MPC will be hoping that the growth that manifested in the second quarter of 2010 will be maintained. On the plus side, interest rates are low, and there is much spare capacity in the economy. Consumers have already been improving their saving levels, and record low interest rates is hardly much incentive to keep saving. It will be a nervous few months.

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