Household spending by all UK households amounted to over £500 billion in 1997, or 63% of gross domestic product. This level of expenditure is very closely related to conditions in the country's macro-economic environment. For marketers, it is crucial to be able to read the macro-economic environment and to predict the effects of change in demand for their goods and services. Identifying turning points in the economic cycle has become a work of art as well as science, as consumers frequently confound experts by changing their expenditure levels in a way which could not have been predicted on the basis of past experience. During the Autumn of 1998, mortgage rates in the UK were falling; unemployment was close to its lowest level for two decades; pay rises were keeping ahead of inflation; and share prices were recovering from their recent falls. Yet expenditure by British households was falling sharply. For three consecutive months retail sales fell in value, with retailers such as Marks and Spencers and Storehouse reporting below expected levels of sales. Retailers have traditionally found excuses to justify poor sales to their shareholders, including weather which is too cold/too hot. Even the death of Diana Princess of Wales was widely blamed for keeping people out of the shops. Throughout 1998, prices of consumer goods had fallen significantly, with consumer durables down in price by an average of 2% in a year and clothing by 5%. Economic theory would have suggested that lower prices would have resulted in higher sales, especially considering the other favourable elements of the macro-environment. However, this did not appear to be happening. What else could have been happening in the marketing environment to explain falling household expenditure? At the time, the media was full of reports of an impending global economic crisis, triggered by difficulties in the Asian economies. Consumer confidence is crucial to many high value household purchases such as houses and cars, with consumers reluctant to commit themselves to regular monthly repayments when their source of income is insecure. Even this may be only a partial solution, as a survey of consumer confidence carried out in October 1998 by GFK on behalf of the European Commission showed that although consumers were pessimistic about the state of the national economy, they were quite upbeat about their personal financial situation.One possibility was that consumers had become cannier. If prices are falling, why not wait longer until prices have fallen further? Consumers had also witnessed the effects of previous over-borrowing and had been more cautious during the recent period of economic growth, resulting in a historically low level of personal sector indebtedness. In 1997, 9% of disposable household income was saved, compared with just 3% at the height of the economic boom of 1988. For companies who need to commit resources a long while in advance in order to meet consumers’ needs, an accurate understanding of the market environment is crucial if stock surpluses and shortages are to be avoided. But this case shows that getting it right can still be very difficult. Review Questions 1. Identify all of the environmental factors that can affect the demand for consumer durables and assess the magnitude and direction of their impact. 2. In what ways can a manufacturer of consumer durables seek to gain a better understanding of its marketing environment? 3. How can a manufacturer of consumer durables seek to respond to environmental change as rapidly as possible?