There may be light at the end of gloomy economic tunnel that the UK has been trapped in for the past 5 years thanks to tentatively rising consumer confidence.

1. Ruth Tarrant Head of Economics and Politics, Bedales School September 2013
asset prices and leading to a wealth effect. The
government’s fiscal policy has raised the income tax
personal allowance (the amount that can be earned
before income tax must be paid) resulting in an
average increase in take-home pay of £300 over
this next year. The effects of the government’s
Funding for Lending scheme, launched in July 2012
in which the Bank of England would lend to banks
and building societies at cheaper-than-market-rates
in an attempt to encourage them to lend to businesses,
finally seem to be being felt.
In particular, consumers are said to be spending on
entertainment and leisure items, such as TVs, tablet
computers, package holidays and restaurants. The
extra spending will, in turn, generate a multiplier
effect, boosting aggregate demand even further.
However, the strength of the multiplier is unclear,
as many of the electronic items are manufactured
abroad and imported, and much spending on package
holidays also counts as an import (and therefore a
leakage from the circular flow, reducing the value of
Confidence boost
There may be light at the end of gloomy
economic tunnel that the UK has been
trapped in for the past 5 years thanks to
tentatively rising consumer confidence.
Whilst many of us have not forgotten that excessive
consumer spending and over-confidence contributed
strongly to an unsustainable decade of economic
boom up to 2008, rising consumer confidence, from
its rock-bottom lows, can only be a good thing, since
consumer confidence is positively correlated with
consumer spending.
A survey carried out by Ernst and Young in mid 2013
suggested that consumer spending, a component of
aggregate demand, would grow by 1.2% over the
next 12 months, and rise to 1.9% in 2014, and then
finally 2.2% by 2015 (which would be a return to
pre-recession consumer spending growth figures).
A number of factors have come together to provide
this welcome boost to consumer confidence. The
housing market has started to recover, boosting

2. Ruth Tarrant Head of Economics and Politics, Bedales School
creep up, due to a weak Pound and bottoming-out
of the Eurozone economies. Business confidence
seems to be rising along with consumer confidence,
and investment growth rates, whilst still low at 1.7%,
are better than they have been.
Whether or not we can afford to be fussy about
whether the growth is balanced growth remains to
be seen. For all of the hand-wringing about the over-
reliance on consumer spending to boost growth in
the NICE decade, at the moment it seems like any
growth will do.
Sources
www.bbc.co.uk/news/business-22838241
www.gov.uk/government/policies/making-it-easier-
to-set-up-and-grow-a-business--6/supporting-
pages/getting-banks-lending
www.bbc.co.uk/news/business-23807182
the multiplier). Restaurants and bars, however, generally
provide a strong local multiplier effect.
The associated accelerator effect, whereby an
increase in consumer spending leads to a more than
proportional increase in investment, may also be
limited, as most of the investment will be into the
Chinese factories making the gadgets bought by UK
consumers. So, whilst a rise in consumer spending
may boost AD, the overall effect may not be as large
as if the boost to aggregate demand came from
exports or investment.
Furthermore, these items are also rather income
elastic. If incomes do not rise as quickly as consumers
expect, or if the economy falters again, spending on
gadgets and holidays will quickly fall, and the boost
to growth will be short-lived.
However, there is some evidence that these growth
forecasts are starting to become true. The ONS has
been revising upwards its growth figures for the UK,
and also noted that net export demand is starting to