Is it wise to rely so heavily on a recovery led by consumer spending?

There has been some recent data and a good deal of spin about the economic recovery becoming more secure and that it is time for businesses to start investing for growth.

While unemployment may be steadily decreasing, the housing market picking up and consumer spending rising a little it would, in our view, be wise to be cautious, not least because the Government seems to be relying a little too heavily on a consumer and SME-led recovery.

Firstly, there has been evidence that the jobs being “created” are part time and low-paid and that in any case wage increases are lagging far behind the rising cost of living. 

Secondly, on the evidence so far, households will be facing hefty utility and energy price rises in the region of 10% by the end of the year, despite Thames Water’s attempt to increase water rates next by 8% being rejected by the watchdog. 

Thirdly, there is also some evidence that increased consumer spending is yet again being financed by credit cards and personal debt, which has been rising steadily since mid-2012. 

Fourthly, there are still plenty of voices arguing that the ‘Help to Buy’ scheme is merely pushing up house prices and borrowing to “bubble” levels – a point reinforced by property website Rightmove, which revealed a 10% rise in property price in London in October and of an average 2.8% in asking prices in most parts of England. 

It would appear that measures to stimulate the economy are working, but can we be certain these are not a pre-election gimmick that conceals the truth? 

Regardless of short term statistics, consumer spending will continue to struggle while personal and SME levels of debt are so high and households continue to worry about making ends meet. In such a market SMEs as well as consumers might be wise to wait until after the election to confirm growth is sustainable before making big investments.

 In the meantime they would be well advised to continue paying close attention to cash flow, paying down any expensive debt or hoarding cash and if necessary restructuring to be as lean and fit as possible ready for the moment when the fat lady really does start singing, IF she does. What do others think?

 

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