No consumption, no growth

Been feeling poorer recently? That's because probably you are.

The chart shows what has happened to the level of real wages (growth in earnings adjusted for RPI) since Dec 06.

That's right over the course of a year the average worker has got about 10% worse off as a result of wage growth falling below RPI.

In the past few weeks the commentariat have gradually come round to the idea that the UK economy may be in trouble. Most economists now predict a slowdown in the UK economy with a few foreseeing a recession in 2009.

Now Woody likes nothing better than to violently disagree with a growing consensus. And in a manner of speaking he does.

The consensus is still ridiculously over-optimistic on growth.

In our economy the primary driver of growth is the consumer. Real wages are falling. For the past few months the UK consumer has been raiding the remainder of its meagre savings and slapping the rest on plastic in a desperate struggle just to maintain living standards.

Meanwhile borrowing costs are rising, as is unemployment. House prices are falling, and mortgage equity withdrawl is drying up.

So how on earth can consumption grow in this environment? It can't, it's going to fall sharply, and stay lower for a long time while household balance sheets are repaired. And with falling consumption will come recession.