The contraction in private consumption will result from a surge in redundancies, across-the-board falls in nominal wages (given the high rate of inflation this implies a marked fall in real incomes) and as indebted households look to rebuild their balance sheets.
First, the administration's Fiscal First strategy will be big, but the additional government spending component probably cannot be large enough to fully counterbalance the contraction in private consumption.
And negative wealth effect from fall in equity prices on the wake of a bleak 2009 for corporate profits will also contribute to the contraction in personal consumption by an estimated $100 billion (compatible with a 25% contraction in the stock markets).
The Great Recession, which began in 2008, brought about large contractions in aggregate consumption in many countries.
We are looking at some major contractions in output, consumption and employment just at a time when the economic recovery seems to be getting legs.
When banks sustain large losses, like the savings and loan association crisis in the 1980s or the collapse of the Japanese bubble in the 1990s, the result is a contraction in credit, a slowdown in consumption and investment, and a recession.
"We expect the UK economy to stagnate in the second half of the year, caused by a slowdown in consumption and a contraction in business investment.
If they did it all in one quarter, the result would be a 25% drop in consumption and a 15% contraction in the economy.
The global economy is now literally in free fall as the contraction of consumption, capital spending, residential investment, production, employment, exports and imports is accelerating rather than decelerating.
As early as Q1 of 2009, GDP data showed signs of resilient consumption despite the contraction in investments and the collapse of the industrial sector.
