The UK economy entered 1992 having experienced one of the largest falls in the volume of domestically produced output during a single calendar year in the post-war period, with output likely to have fallen by close to 2-5 per cent in 1991. However the pace of the decline has begun to moderate in recent months, with activity in the second half of the year around 2 per cent lower than a year earlier. With oil production having recovered since the summer, it seems likely that onshore activity declined for the sixth successive quarter in the final three months of 1991.
As yet there is little tangible evidence of any recovery in activity in the early weeks of this year, with consumer and business sentiment remaining depressed. The latest provisional estimate of the longer leading cyclical indicator published by the CSO exhibits a small downturn, with housing starts failing back in the last quarter of 1991 and a decline in business optimism in the latest CBI Industrial Trends Survey.
The balance of respondents who became less optimistic in the CBI survey was close to that recorded in the survey of last July, reversing the apparent improvement in the business outlook recorded in the October survey. However, as with the October Survey, it remains true that over half the firms questioned did not report any change in optimism, even though demand expectations proved over-optimistic for the seventh successive quarter at the end of 1991. In contrast to the turnaround in general optimism there was little change in expectations of new orders or the volume of output. It seems quite possible that optimism may have been adversely affected by the survey being undertaken at a time when sterling was under pressure within the ERM and there was considerable speculation about an upward move in base rates.
Recent indicators suggest that consumers' expenditure failed to recover over Christmas, with retail sales volumes being little changed in the fourth quarter of the year. Overall consumption may have fallen by around 2 per cent over 1991 as a whole, with the personal sector savings ratio rising to close to 10-5 per cent. As in our previous forecasts we are currently anticipating that consumption will remain subdued throughout 1992, with growth being around 1 per cent and the savings ratio remaining close to its present level. The profile of the savings ratio is shown in Chart 1.
We have argued for some time that the slowdown in consumption can be viewed as a counterpart to a desired adjustment in the financial position of the personal sector. The scale of this adjustment is apparent from the rise in the savings ratio and the slowdown in consumer borrowing. The net new flow of consumer credit is lower in real terms than at any time since the mid-1970s with a net repayment being made in the last quarter of 1991.
The factors behind this adjustment reflect developments on both sides of the personal sector balance sheet. The 1980s saw the...