Household spending drops as economy shrinks 0.5%

Official figures show that lower household spending contributed to a 0.5% drop in UK output last quarter...

Last Updated: 06 Nov 2012

The UK economy shrank by 0.5% in the three months to September, according to the Office of National Statistics, following its flat performance in the second quarter. The stats looked pretty grim across the board, with manufacturing output dropping by 1.3%, services falling 0.4%, and household spending down 0.2%. Even if we won’t technically be in recession until the end of December (because it requires two consecutive quarters of contraction), it’s clearly only a matter of time.

According to the ONS data, the fall in output in the third quarter was largely due to slower sales of cars and household goods – indeed, the retail, hotel and catering sectors contracted by 1.9%, the biggest drop for nearly 30 years. Clearly shoppers are choosing to preserve their pennies rather than splash out on consumer goods – and who can blame them?

The Government appears to think it can solve this problem with a 2.5% cut in VAT, but not everyone is convinced they’re right (will a 2.5% discount really persuade you to buy something you wouldn’t have bought otherwise, particularly when retailers are already discounting heavily?). And others are worried about the cost implications of this fiscal boost. In addition to the tax hikes already announced, we also learned today that the Government seriously considered increasing VAT to 18.5% after the next election to claw back some cash. Not exactly  the ideal way to underpin a recovery...

At least today’s gloomy figures won’t come as a huge surprise to anyone. Even Alistair Darling admitted in Monday’s Pre-Budget Report that the economy would probably contract for the next four quarters, with a drop in GDP of between -0.75% and -1.25% in 2009 before a recovery in 2010. However, lots of commentators think he’s being ludicrously optimistic – the OECD, for example, thinks that Britain will suffer a worse recession than almost every other developed nation, and predicts that 2010 growth will be barely half the Chancellor’s forecast. It wants the Bank of England to slash interest rates again forthwith.

But with the EU now touting a €200bn rescue package, this won’t be enough to pay off the Government’s £1trn credit card bill. The Treasury may also end up flogging the the family silver, with the Royal Mint, the Tote, Ordnance Survey and the Met Office all apparently for sale at the right price. We may not be buying, but the Government is definitely selling...

In today's bulletin:

Desperate Woolworths looks to BBC for salvation
Household spending drops as economy shrinks 0.5%
Why lower VAT could cost businesses money
Gladwell: The secrets of success
Bad managers are a real killer

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