It has become a truism that consumer spending provided most of the growth in the UK economy in recent quarters. What is perhaps less well-known is that the economy would have almost certainly contracted in the first quarter of this year (2003 Q1), had it not been for the recent increase in mortgage equity withdrawal, which helps fuel consumer spending.
We estimate that the increases in MEW contributed 0.3% to UK GDP in 2003 Q1 as follows:
1) Assume that one half of any quarterly increase in MEW is spent in that quarter and the other half in the following quarter. This produces a ‘MEW increased spending effect’ in 2003 Q1 of £1.75bn.
2) Assume that 50% of MEW spending is spent on imports. This would suggest that UK GDP in 2003 Q1 was buttressed by around £0.9bn as a result of recent increases in MEW, equivalent to some 0.3% of GDP.
It therefore appears that, had MEW in 2002 Q4 and 2003 Q1 remained at its 2002 Q3 level, UK GDP in 2003 Q1 would have shrunk by around 0.2%.
Overall, it seems unlikely that the quarterly level of MEW can continue to increase in the way that it has and once it stops rising some other factor will have to help to provide economic growth.
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