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Friday, 18 January 2008

Belt tightening at Christmas

The Office of National Statistics today produced the December retail sales providing further evidence that the United Kingdom is entering a significant slowdown. These figures add further evidence to suggest that 2008 will be a tough year across the whole economy, not just financial services.

The figures showed that despite it being Christmas and prices being slashed, people have been either unwilling or unable to spend their money either at the shops or online. As a result sales volumes in the three months to December rose by only 0.4 per cent compared to the previous three months and between November and December sales volumes actually fell by 0.4 per cent – mainly in the non-food sector.

Even though many will not have felt the pinch of higher interest rates, lower house prices or higher unemployment, most believe it is coming. Therefore consumers are tightening their belts in anticipation of a rough year. Many people will be looking at their savings (or more likely debt) and wondering how they will be able to pay their mortgage when it is set at a higher rate, or how they would survive if they lost their jobs.

Economic slowdowns are created as a result of both fundamental problems with the economy and people reacting to them. Without this reaction economic activity can receive a significant boost making a downturn less severe. However, without these reactions the economy is merely making the problem worse in the long run. Economic fundamentals become ever more stretched – such as savings, debt and household budgets – and eventually a significant correction is required. This correction could come as a short, sharp shock or it could be a sustained period of below average growth. Either way, this will be painful process for many.

In many ways the UK economy has been putting off a slowdown for too long. Economic fundamentals are looking unbalanced and in need of correction. The extent and timing of the correction is still not clear, however, it seems certain that it will begin in 2008 and will be unpleasant for many.

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posted by Carl Malways at | 0 Comments Links to this post