Consumption is key to economic growth, but no need to worry

There are certain phrases in common use by economists and investment pundits which tempt me to deduct five points from the speaker’s IQ whenever I hear them. The statements in themselves are not obviously stupid, but they betray a certain preoccupation with the small scale and the short term as opposed to the big picture and the enduring future.

For a prime example of these clichés look to the many discussions of the US economy, and more specifically the role of the consumer. We’re often told something along these lines: “The consumer accounts for about 70 per cent of the US economy, so without a recovery in consumer demand the US can’t grow.”

This is usually said in tones which imply that the speaker is doing us a favour by sharing a striking insight and – because of this and because the US still has a massive influence on the rest of the world – we pay attention.

The average American is seen as a greedy hedonist, lusting after a bigger house, smarter car, and shinier gadgets, and happy to borrow lots of money to get them. The whole US economic machine, and much of the rest of the world, is dependent on carrying an increasing stream of juicy worms into the ever-open beak of this ravenous cuckoo.

So when we hear that the cuckoo has indigestion and the worm factory is on short time, the predominant reaction is fear for the worm carriers, mixed with a certain self-righteous satisfaction that the Americans have at last got their come-uppance. Producers, in this latter world view, are prudent, thrifty hard-working folk, whereas consumers are feckless and flighty.

Of course, it doesn’t take a great deal of thought to realise that, ultimately, it isn’t 70 per cent but 100 per cent of every economy that depends on the consumer (wherever they may be). Every link in the economic chain is held in place by the fact that eventually someone wants to consume the product or service being generated. This point may be far away in time and place, but it is still there.

Even the simplest everyday product, like a ballpoint pen, is the visible result of a vast invisible network of capital investment in mines, oilfields, petrochemical plants, production lines and power stations, projects which can cost billions of pounds and take many years before they start to earn money.

For thousands of years philosophers and moralists have stood on the sidelines fretting about materialism, but for the great majority of people there has always been one simple imperative: “More.”

If the Americans or the Europeans are temporarily glutted, there are billions of consumers in the emerging economies to take up the slack. There is something of a paradox here, in that we seem to be able to worry at the same time about the West consuming too little (which equals recession, gloom and unemployment) and the East consuming too much (which equals inflation, pollution and a shift in the balance of power).

Apart from rebalancing demand from West to East, there is also an element of rebalancing consumption from the present to the future. Since debt allows us to pull forward consumption, reversing the rise of debt logically implies that for many people the waiting is going to be put back into wanting.

It is true that individual businesses which have ridden the boom in debt-fuelled consumption over the past 20 years are now facing much stronger headwinds, and the failure rate is rising sharply. It is equally true that the current crisis in the West is on an entirely different scale from the cyclical downturns we have had to deal with in the past.

But they do leave intact the probability that, taken as a whole, the world will continue to produce and consume more things year after year well into the foreseeable future, and that there are businesses both in this country and elsewhere which will make excellent returns for their shareholders by meeting these growing demands.

l Gareth Howlett is fund manager director at Brooks Macdonald Asset Management