Looking at the UK's main economic statistics, it would suggest a positive economic picture.
- Economic growth is high.(2.9%) Since 1992, the UK has achieved the longest unbroken period of growth on record.
- Inflation is low. At 2.2% CPI inflation is very close to the government's target of 2%
- Unemployment is very low 5.2% (labour force survey) and Employment has reached record levels.
When the chancellor delivers his budget tomorrow, expect a lengthy self congratulatory note about the strength of the Economy. However, why will people be sceptical about the rosy picture he tries to paint? He is not making the statistics up. - Unemployment really is low and the record period of economic growth is very impressive.
These 3 main economic variables do suggest a positive economic outlook. However, if you conducted informal interviews with people in the street, you would probably find that the average consumer doesn't view the economy in a similar light.
Recently, I asked my economics students to ask other people about their perspectives on the economy; the results were quite interesting. People don't tend to think in terms of national economic statistics; their economic view is determined by their individual circumstances and anecdotal evidence.
For example, people notice things like the cost of housing, food at supermarkets and the price of petrol - they not even know what is meant by CPI inflation. In the Times today, there is an opinion poll with questions on things that reflect people's living standards. For example questions like:
Compared to last year:
- Are you more worried about losing your job?
- Are you eating out in restaurants?
- Are you buying new clothes?
- 8% say they are buying more clothes than last year, but 55% say they are buying less.
- 36% are more worried about losing their job, 12% are less worried.
Some Notes on these Opinion Polls and Statistics
- They are unscientific and rely on broad judgements from people. They are very much normative opinions.
- It is noted that people often tend to give a greater weighting to negative things rather than positive things. For example, people complain about rising petrol prices, but they give less attention to the fact the price of electrical goods has been falling.
- Official statistics are often backward looking. Growth of 2.9% is largely indicative of economic decisions made in the past 12 months. Current opinions will shape growth rates for the next 12 months. For example, if we become pessimistic, it may take a while for us to reduce our spending and lower growth rates. There is a time lag; therefore capturing the 'mood' of shoppers can be useful for gaining an insight into the future direction of the economy.
- People can forget how bad things were and have a rosy view of the past. For example, interest rates at 5.25% make mortgage payments relatively cheap compared to 1990 when interest rates reached 15%.
- There is always a danger that people can 'talk themselves into a recession'. If we are excessively pessimistic and fear losing a job (even if it is not really rational) then it may become a self fulfilling prophecy. If you fear a recession, you spend less, save more and therefore aggregate demand will slowdown and this change in behaviour could cause a recession.