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Thursday, 25 August 2011

Fall in Consumer Confidence

Consumer confidence continued to fall last month amid increased uncertainty around the UK's economic outlook and is set to dip further in August, a survey said today. The recent riots earlier this month could trigger even more deterioration in confidence as the violence hit people's willingness to spend, Nationwide Building Society warned.

Nationwide said its Consumer Confidence Index was 49, well below its average reading of 79. In June, the reading was 51.

Economists are predicting that the rest of 2011 will see no considerable improvement in consumer confidence. This may lead to even greater falls in stock markets around the world and could lead the world back into recession. Falling consumer/business confidence is the last thing we need to achieve periods of economic growth in the coming years. The LRAS curve may shift leftward if AD and (SR)AS shift leftward too.

The Government’s plan to freeze public sector pay for now and other private sector firms simply not rising wages in line with inflation (known as fiscal drag) means that the cost of living is rising, severely affecting consumer confidence.

Major purchases of big-ticket items are the hardest hit, Nationwide said, and consumers also continue to expect a fall in house prices over the next six months. This means the value of people’s assets are falling, and consumers will feel ‘poorer’ furthering the fall in consumer confidence.

Word of the Day

Backwards Bending Supply Curve

When the wage rate is W1, the number of hours worked is L1. If wages rise to W2, the number of hours worked rises to L2. This is due to something called the substitution effect. The substitution effect relates to the fact that leisure becomes more expensive compared to the other goods that money from wages can buy (for example, the worker can now start buying food from the Asda ‘Extra Special’ range rather than ‘smart price’ products). Workers prefer to work over leisure time. The worker responds to the rise in hourly wage rates by substituting more labour over leisure time.

After wages rise to W3, labour – the number of hours worked – falls to L3. This is because of the income effect. The income effect relates to the fact that a worker can achieve a target income without working so many hours and therefore prefers more leisure time once this target income level has been reached. A worker chooses to work fewer hours to enjoy more leisure time because leisure time is a normal good, rather than an inferior good. This means that as real incomes rise, demand for leisure time – the normal good – rises as well.