Stable consumer prospects

The three major components of gross domestic product are consumption, government spending and investment, and by far the most important for any modern economy is consumption. Henderson Global Investors director of global economics and strategy Tony Dolphin says it accounts for about two-thirds of GDP with corporate and government spending each making up about a sixth. Gartmore Govett US Opportunities fund manager Gil Knight has the consumer making up between 50% and 60% of the American economy, and Newton American fund manager Simon Laing says 70% of output in the world’s largest economy is “consumer-related”. Given the importance of the consumer, capital expenditure could not fill the gap if there were a large drop-off in consumption. Its contribution would be washed away with any major correction in personal spending. But what are the chances of the consumer seriously cutting back? Some believe it is unlikely to happen. Dolphin is one of these. He says there will be a “bit of a slowdown”, which will be offset by corporate spending. And Laing does “not see a fall-off in the consumer”, who he predicts will be “stable”. One point identified by managers when they talk about the prospects of the consumer is the positive impact of fiscal policy. Governments can influence output either indirectly, through supporting the consumer with tax cuts, or directly through spending plans. In recent times they have been keen to emphasise tax incentives. Last February, US Treasury secretary John Snow unveiled the Bush administration’s tax-cut proposals. And before Germany helped destroy the EU stability and growth pact in November, Chancellor Gerhard Schroeder had already caused consternation at the European Central Bank by moving tax cuts planned for 2005 forward to 2004. Laing says tax cuts will play a role in the US. And Legg Mason US Equity fund manager Mary-Chris Gay believes the full benefits of these are yet to feed through the system and into the pockets of consumers. Meanwhile, Threadneedle European Select Growth deputy fund manager Phil Cliff says: “We are seeing tax cuts coming through in Germany and France, and if you look at public spending, that is good too.” HSBC European Growth fund manager Jeffrey Currington adds: “Governments are speaking of cutting taxes a lot over the next couple of years, and the impact will be positive.” The breakdown of the stability and growth pact will be positive, say some. M&G head of global analysis John Hatherly believes its demise will allow countries to carry out more sensible fiscal measures, stepping up support in a downturn while drawing back as economic performance improves. In the US, Gay says direct government spending will have an “important” impact – a point echoed by Baring Asset Management chief investment officer Michael Hughes. Many think the consumer is unlikely to fail, and managers are confident about the impact of taxes on his habits. There also appears to be further support from direct government spending. These factors will mean that corporate spending, if it increases, should have a meaningful impact on overall GDP in the year ahead.