In all six recessions I can remember, inflation and interest rates went up at the same time as unemployment. Next year will be very different, so that predictions about how things will pan out over the next two years are all pretty flaky.
The ‘misery index’, a combination of inflation and interest rates, has been rising for most of this year, and in previous recessions it kept on rising as the economy tanked and unemployment rose. But next year the misery index is sure to fall, because both inflation and interest rates will be falling sharply.
In fact, I reckon the drop in fuel and food prices plus the drop in interest rates will boost the net income of someone with a typical mortgage by about £1,500 a year - that’s almost 10% of the average net income. For the past few years, consumers’ disposable income has been falling thanks to tax rises as well as higher fuel and food prices. Next year will be the first in which consumers’ disposable income increases sharply at the same time as the economy stalls and the rate of inflation drops.
So using previous recessions as a basis for predicting what will happen over the next year or two is very questionable - yet that’s the basis for all the gloom-and-doom forecasts you see in the media. I am not as pessimistic as these forecasters.
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We’ve already had the benefit of lower petrol prices, but lower domestic energy bills should also come through next Spring as wholesale energy prices work their way through the supply chain. Over the past two year, tax, energy, food and petrol bills have just kept on rising, but in 2009 the reverse should happen and almost every month should see one or other bill going down. It’ll take a while for people to adjust to this, just as it took a while for people to adjust to rising bills. But by Spring next year, people will be aware that they have a bit more money to spend.
The question is what people will do with their higher disposable income next year. Will they use the cash to pay off debts and accumulate savings? They need to do that, because we’re not saving enough. But if they save it all, the recession will get nasty. If consumers spend some of their higher income, we’ll get a smaller rise in unemployment and fewer businesses going under, and the recession could fizzle out before the end of 2009. If we save all our extra income, the recession will grind on into 2010 and the government will have to slash taxes to prevent things getting much worse. My guess is that we will spend enough of the windfall from lower fuel and mortgage payments to prevent retail sales collapsing. But we won’t really get a good handle on this until Spring, because we’ll need several months to adjust our spending and saving.
Regardless of what next year is going to be like, we can expect an orgy of price cutting in the New Year sales, and the best money saving tip I can think of for parents is to fob the kids off with small presents this Christmas and get them what they really want when the sales start.
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