Interest rates will stay low and property prices are on the rise, so there is good cause to expect consumers to continue spending this year
Interest rates are at rock-bottom levels. House prices are rising. Unemployment has shown signs of hitting a plateau. It should come as little surprise that many of Britain's biggest high-street names have been reporting that business was brisk over Christmas.
The question both for individual companies and for policymakers is whether the trend will continue once the credit card bills for the spending splurge start to thud onto doormats in late January and early February.
There is bound to be some softness in consumer spending in the first few months of 2010, because some of the activity in the shops and car showrooms was the result of people bringing forward purchases to beat the end of the VAT discount.
The fourth quarter of 2009 will be strong, but only at the expense of a weaker first quarter of 2010. That will apply not just to retail sales but to big-ticket items of spending such as cars, where the planned expiry of the cash-for-clunkers scheme next month will present dealers with a more challenging selling environment.
Looking through the short-term distortions, the outlook for consumer spending will be determined by the interplay of forces pulling in opposite directions. On the upside, there is little immediate sign of monetary policy being tightened. The Bank of England kept the bank rate unchanged at 0.5% today and the City expects borrowing costs to remain at that level until sustained economic recovery is in the bag. Even though the economy will have returned to growth in the final three months of last year, higher interest rates are some way off.
Consumers also tend to be more willing to spend – and borrow – when property prices are on the rise. And while a good part of the explanation for the upward trend in prices since the spring of 2009 has been a shortage of supply, there is no immediately obvious reason why prices should go into reverse. The levelling off in unemployment should help underpin the market.
But there are reasons to be cautious. Firstly, there's the likely squeeze on real incomes, a key determinant of spending. One reason unemployment has risen less rapidly than feared is that workers have swallowed pay freezes or pay cuts during 2009. That process is likely to be repeated in 2010, with rising inflation in the first half of the year further eroding spending power.
Secondly, there is the threat that fiscal policy – taxation and public spending – will be tightened even though monetary policy will remain loose. The public could hardly be unaware that serious attempts will be made to slash the government's budget deficit, whoever wins the election in May. Recent signs of a softening in consumer confidence suggest that voters are already getting the message.
Finally, there appears to be little appetite – either from borrowers or lenders – for a return to the debt-fuelled consumption of the boom years. Credit is available, but only for those who don't really want it.
What does all that mean for the high street? Business will be better than in 2009, but it will be no bumper year. For the canny consumer, there will be plenty of bargains.
Copyright Speakers Corner 2017