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Recent Trends In The Growth Of Consumption And Investment Spending


The chart below suggests a positive relationship between the growth of consumer demand and gross fixed capital investment. Investment demand was fairly sluggish during the mid 1990s - in part because consumer demand recovered only slowly from the previous recession.


There was a clear acceleration in consumer demand during 1997-98 and business investment followed suit. Rising demand, capacity shortages and low interest rates all acted to stimulate increased capital expenditure.


A slowdown in the British economy during 1998-99 is shown in the chart. The growth in consumption fell quite steeply from the 1st quarter of 1998 and investment demand has also grown more slowly. However the UK economy avoided a recession and this should mean an absence of economy-wide capital scrapping (negative growth of real capital spending) which has been a feature of previous slowdowns and recessions.


Some capital investment spending is undoubtedly demand-induced by the rate of growth of consumer demand supporting the accelerator theory, however other factors also determine investment.  



E-mail Steve Margetts