Long-term Risks of Robust Consumer Behaviour

Philip Arestis and Elias Karakitsos
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Elias Karakitsos: University of Cambridge

Chapter 7 in The Post-Bubble US Economy, 2004, pp 167-205 from Palgrave Macmillan

Abstract: Abstract In the second half of 2003 consumption rebounded because of an improved outlook for the corporate sector, higher confidence because of lower geopolitical risks and in view of the new round of tax cuts and higher government deficit. The short-run factors that affect consumption improved over the same period, and expected to remain buoyant in the course of 2004. Employment prospects are much better, inflation will remain subdued for a while and real disposable income growth will remain buoyant. Moreover, further gains in the property market and recovering equity prices mean that the imbalance of the personal sector has narrowed, in spite of higher indebtedness that stands at an all-time high. Hence, the outlook for consumption in 2004 has markedly improved. However, there are still long-term risks to consumption, especially so if growth in 2004 turns out to be strong, boosted once more by easy fiscal policy. Interest rates would rise and would undermine the outlook for the corporate sector, which would adversely affect the short-run factors that affect consumption. In addition, higher interest rates would adversely affect the long-run factors that affect consumption. Higher rates would threaten to lower both house and equity prices once more. In this case the personal sector imbalance would widen once again and this time it may lead to retrenchment by households that may even develop into recession in 2005, unless, of course, sufficient government deficit is in place. Slow growth in 2004 is preferable than fast growth, as none of these risks would materialise.

Keywords: Fiscal Policy; Disposable Income; Personal Income; Current Income; Corporate Sector (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1057/9780230501058_7

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