The last gasp for British consumers

Feb 27, 2009

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Banks were firmly in the spotlight this week with "Operation Broom", the government's £500bn plan to insure losses on toxic assets and encourage lending. Northern Rock, having spent the last year shedding borrowers, is now being told to make £14bn of fresh loans, which will make scant difference to the overall downward pressure on borrowing and house prices.

Yet consumers are in surprisingly good form. The Confederation of British Industry said 27% of high-street stores reported improved sales in the first half of February and 52% reported a slide. The balance of -25% is hardly spectacular, but it's the highest since last June. Official figures showed a 0.7% monthly rise in sales volumes in January, and the British Retail Consortium's sales monitor for January revealed the first positive growth since early 2008.

Why consumption will falter

Still, Capital Economics points out that while sales ticked up in the fourth quarter, overall consumption fell 0.7%, and big-ticket items are struggling. That indicates that, away from the high street, where matters have been helped by aggressive discounting, things are less cheery.

And although lower mortgage payments and fuel bills have boosted real incomes, unemployment is likely to rise by 1.5 million, undermining confidence and incomes. Household wealth is rapidly being eroded by slumping house prices, with falls of another 20% likely, said Capital Economics. Indebted consumers are thus set to cut back and rebuild their depleted savings.

So, as David Wighton said in The Times, the smart money is on consumers eventually giving up the ghost.

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