Business and Economics at SHSK

For everyone studying business and economics this is the key question....................
What's going on in the British economy?
There is recovery but is it sustainable? A2 Economics take special notes as this is what we will be studying later  this week.
The mystery is why the recovery is happening now, as opposed to last year or next year or some other time. And why are households increasing consumption when their real incomes have fallen and set to fall further?
There is an issue about the sustainability and quality of this recovery when the only cause is Consumption - without British exports markets (e.g. Europe) recovering, and without UK business investing again it may not be sustainable.
Contrast this with the article below about China - their growth is Investment led not Consumption led.
Most people would say, of course, that any recovery will do, after recession and stagnation. But it matters that private sector companies follow the lead of consumers and start spending.
The recovery has been driven by households spending a good deal more than economists anticipated because this has happened at a time when a typical household income has fallen 6.4% since the 2008 crash.
Which begs the question why on earth we are spending more.
Economists and A2 business  - You know the answer from last weeks - it is because  we are saving less.
The ratio of people's saving to income,  is falling from 6.8% last year - which some would see as a healthy rate - to 5.7%.
 5.7% is still pretty high compared with the negligible saving we did in the boom years. But given households' still massive indebtedness - more than £1.5 trillion, equivalent to more than 140% of available income - many would argue that the rate of saving is on the cusp of being inadequate.
The picture of individual indebtedness is not pretty: the debt is unevenly distributed, and somewhere between 5m and 9m households would struggle to keep up the payments if interest rates were to rise to anywhere near levels regarded as normal in the UK.
So why are Households  saving less?
Could it be the WEALTH EFFECT with the revival in the housing market, which has seen prices surge in London and the South, and stabilise elsewhere - such that people feel a bit more confident about their individual net wealth?
Could the surge be because of the governments  Funding for Lending scheme, which has increased the flow of lending to buy houses, and made mortgages cheaper.
But the government has announced it is reducing this scheme so may be growth will not be so storng for the coming year.
OR Could it be the very loud noises made over the summer by the new governor of the Bank of England that interest rates aren't going to rise any time soon, his famous - or perhaps notorious - forward guidance?
Or could it just be that there haven't been any huge economic or financial calamities in the world since the near meltdown of the eurozone at the end of 2011, and we've just forgotten that many of the structural economic flaws here and abroad, especially in Europe, that are yet to be fixed.
Robert Peston says ‘For what it's worth, my hunch would be that the Bank of England's half promise not to increase the cost of money played a big role - on the totally unscientific basis that the question you ask me more than any other is what is going to happen to interest rates’.
Which would imply that any hint that interest rates are set to rise soonish could stop the recovery dead in its tracks.
Once again this illustrates the vital importance of Interest rates in the UK economy.