News from the British Retail Consortium that retail sales, online and offline, are falling more rapidly is another stark warning that the economic future looks bleak. The mechanism by which a recession happens is well-known to economics: as consumer spending falls, shops and suppliers sell less and so begin to cut costs, including staff costs. But this cost-cutting by suppliers depresses demand still further, since those on reduced hours or lower pay spend less, reinforcing the slide downwards. The whole economy tips into recession – marked by falling output and potentially rising unemployment.
Yet even as we face what looks like an inevitable slowdown over the rest of this year, conventional economic thinking has been found wanting. It is rising prices that are forcing consumers to spend less, pulling back on “discretionary” spending from Netflix to furniture so they can afford essentials like heating and food. Rapid price increases in those essentials are the fundamental factor behind falling overall consumer spending. In major developed economies, where 70 per cent or more of all activity depends on consumer spending, this is a major drag. It’s not hard to see the problem and there’s a broad consensus on the culprit.
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