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Consumer habits and innovation: How do our spending decisions shape the economy?

Spencer Thompson

11 July 2012

The spending patterns of consumers are a significant driver of changes to the UK economy. Between 1997 and 2009 over two thirds of GDP growth was accounted for by consumers purchasing goods and services. But it is the shifting patterns of what things consumers want to buy, and the extent to which UK producers can meet that demand, that determine how much the UK economy benefits from greater consumer spending.
Today at the Big Innovation Centre we are publishing research on this subject, highlighting several worrying trends in the UK’s ability to satisfy consumer demand. The products that have seen the biggest increases in consumer spending over recent years tend to be those that the UK imports a lot of, like clothing and consumer electronics. And in most of these high-growth and highly innovative markets the UK has a substantial trade deficit, meaning the UK’s failure to make the most of changing consumer tastes is acting as a drag on UK economic recovery.
Whilst this finding won’t come as a shock to many of us, the sheer scale of this weakness is illuminating, and goes a long way towards explaining the UK’s longstanding trade problem. For example, the UK’s combined trade deficit in clothing, consumer electronics and vehicles, three key consumer product markets, accounted for over 40% of the deficit for the whole economy in 2009. Getting it wrong in a few key consumer markets can therefore have dramatic consequences for the UK’s trade performance.
What can be done about this? It is clear that in many of the most innovative consumer markets of the past decade, the UK has substantially missed the boat. It is unlikely at this late stage in their technological evolution that the UK can produce a consumer electronics giant on the scale of Apple or Samsung, for instance. But by looking ahead and providing strategic support there may be potential for the UK to become an early leader in the consumer products and markets of the future, in areas as diverse as personalised healthcare and mobile banking.
In the report we argue that UK policy needs to take the concept of ‘market making’, as outlined in a blog published here last week, more seriously. By combining intelligent technology foresight, strategic investment, and coordination of the state-led institutions in the innovation ecosystem, policy makers can and should help the UK gain a foothold in the emerging consumer markets of the future. The UK has a good record on generating new and exciting technologies, but all too often this has not extended into the vital area of creating highly innovative, disruptive growth markets.

The UK’s inability to satisfy its consumers, other than through increasing imports, has been a weakness of the economy over the past decade and a half. Getting market making right in the future has the potential to reverse this, improving the UK’s trade performance and securing sustainable economic growth.

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