Many people are feeling the pinch right now as a result of the cost-of-living crisis. A perfect storm of events has seen the price of just about everything increase, which can create real financial difficulties, especially as a result of wage stagnation.
Therefore, it makes sense that people are spending less and changing their habits, but this can actually make the situation much worse in the long run and create a spiral effect.
Reduced Demand for Goods & Services
With the cost of goods and services increasing, many people are cutting back on their spending. This means non-essential spending like restaurant meals, nights out, travel, cinema and concert/sports events are experiencing a reduction in demand as a result of low consumer confidence. You cannot expect people to spend in the same manner when inflation is so high, but this can lead to further economic woe.
Reduced Economic Growth
When businesses start to experience a drop in demand and are unable to make as much money, it is inevitable that they will start to scale back to protect themselves and even survive. Many businesses end up folding during economic downturns as they are unable to stay afloat due to a lack of demand. When this starts to happen in multiple industries, the economy may enter a recession. As a result of a recession, household spending continues to decline due to people having less income and/or may not feel confident enough to make large purchases/investments.
Reduced Tax Revenue
A downturn in economic activity can also result in reduced tax revenue. This is dangerous because this means that there is less money for key public services, including healthcare, education and infrastructure. When these public services do not receive the funding that they need, it can lead to major disruption and impact the quality of life for many.
Increased Unemployment Rates
Businesses have to make tough decisions during economic downturns. With less demand and money coming in, companies need to find ways to save money and often this results in letting people go. Obviously, this is an awful situation for the individual during such uncertain times and it can further impact the economy when unemployment starts to rise as people will try to reduce their spending even more. Unemployment is something that everyone worries about during times like these, so it is advisable to have an easy-access savings account that you can rely on should the worst happen.
It is clear that it is a stark time economically right now as a result of the cost-of-living crisis. Situations like this can lead to a spiral effect where a drop in consumer activity and confidence further harms the economy, but there is light at the end of the tunnel with many experts expecting the situation to improve in the second half of the year.
