Medically, consumption is an old-fashioned name for the disease of tuberculosis. In economics it is supposedly lifeblood itself. In most developed countries it is the main element of GDP, representing something like 60 per cent of total.
Despite the dangers of overconsumption by way of debt, the tendency to consume rather than save is valued very highly by most economists, who perceive a circular flow of income whose momentum must be sustained.
Indeed, in the Keynesian model, saving has a negative connotation, as if it were a form of anti-consumption rather than a contingency for future consumption, or indeed a necessary resource for investment.
In fact, in that theoretical construct, savings and investment are treated as opposites, which would seem like some form of dialectic contortion.
Beware of theory masquerading as fact, and misleading labels, dangerous in economics as well as medicine.
Regardless of academic musings, there is no doubt that consumption is statistically the key driver for the Western economies.
In Asia, though, that’s not always the case. China, notoriously, has an economy skewed towards investment, said to be around 45 per cent of GDP, compared to household consumption at around 34 per cent, though the data are problematic.
This imbalance, and the extended devotion to construction of roads, factories and housing, is worrying commentators, having created a bubble. The world certainly doesn’t need the East to retrench right now, with the West already in some kind of hole.
That maldistribution of GDP is also deemed to have been instrumental in engendering the financial crisis, at least by policymakers in the US who blame past excess consumption on the equivalent excess of saving in Asia, as if all would be solved by a recycling of Chinese surpluses in terms of consumption abroad rather than portfolio investment into US Treasuries and the like.
Certainly Asia has traditionally had a mercantilist mentality which sees the balance of payments as a matter of winning and losing, with net merchandise export earnings fuelling the acquisition of assets serving both to enhance wealth and entrench some sense of dominance.
Certainly too, what counts as capital imports to the US suppressed long interest rates. But you have to imagine that control of (official) short rates was awry too, and a certain cultural mismatch contributes to the explanation.
Come to think of it, the same type of criticism is levelled at Germany, in fact loudly at this time of trauma in the eurozone, induced, it is claimed, by the continent’s dominant economy not sharing the fruits of its success by various modes of redistributive reorientation to its suffering European partners.
The numbers would tell you that the Gulf exudes a similar phenomenon, with an energy-based payments surplus and reserves accumulation that has to go somewhere. Budget surpluses typically as well suggest a conservativism in policy outlook that can seem both like prudence and as restrictive.
In recent decades the GCC has reinvested those proceeds partly by embracing economic diversification.
As James Reeve, senior economist at Samba told me this week, in the case of Saudi Arabia the idea is to promote industrial clusters, for example in automotive. Yet “in the short term this is not going to provide many jobs to Saudi nationals, which is the object of the exercise”.
In the longer term, though, “I’m reasonably optimistic that the country can develop a growth momentum separate from the influence of high oil prices,” he said. “They seem to be going about it the right way, focusing on their comparative advantage in energy, and using that to foster downstream petrochemicals and all that goes with it (plastics, rubbers, PVC, speciality chemicals, etc.), as well as aluminium.
The other angle, however, is to encourage consumption to propel GDP, which is like a rite of passage in achieving mature, developed economy status (see chart).
In a 2010 research document, senior economist Andrew Gilmour referred to Saudi consumers as the healthiest in the Gulf, with “household debt levels relatively modest, credit conditions favourable, and government fiscal support considerable”.
An updated study by Samba on Saudi Arabia this year imparted that, while inflation had restrained real incomes, retail sales had stayed resilient owing to the continuing impetus of government spending.
While confidence might be knocked, as now, by regional and global events, over time both asset growth (the stock market) and population growth of 3 per cent would stimulate consumption further.
The outlook for oil prices should give ongoing support, allied to a liquid banking sector, although prudential caps on indebtedness remain in place. Individuals’ debt servicing cannot exceed 30 per cent of income, Reeve noted.
While consumption and growth may be great in principle, that’s the kind of practical restraint the Western world could have done with.
Persistently low interest rates were unhelpful, a factor also for the GCC, but that’s another story.
