Are UK Households the key to the Recovery?

As a nation the UK has a long history as a dynamic, skilled country and has historically had strong manufacturing and exports attracting business investment.

However, over the recent years the UK seems to have lost its edge. Our manufacturing sector has stalled and we are now a nation of 'importers' rather than 'exporters'. Business investment, particularly foreign investment has also slowed. These trends have escalated since the credit crunch and it is a troublesome path to be on. So in order for the recovery to really take hold we are going to need to see UK Households driving this, and picking up the slack left by flagging manufacturing and export sectors.

So the big question is 'are UK Households in a position to increase consumption?' Well since the credit crunch we have constantly read how consumers have been squeezed and disposable incomes have fallen - a bad sign if we want consumers to go out and spend spend spend! However, mortgage payments for many households have fallen, freeing up capital to spend. Previously consumers had taken on debt (credit cards, loans) in order to purchase goods and services. What we have seen over the past 5 years is households beginning to de-leverage, paying off their debts and increasing their saving rates. This is a good sign on two fronts; firstly consumers have less debt and so could likely increase their debt levels in order to make purchases. Secondly if households have large savings, they may consider spending this now as they will be earning very low interest by having it in the bank.

So there are mixed signs that the UK Households could increase spending in the economy. What I think we need to see is house prices increasing. This makes home owners feel more wealthy and will encourage them to spend in the economy, this has occurred over the past year in the US. Until this time households will continue to be cautious of their spending, and as such the UK economy will continue to exhibit low growth.