Britain's curious consumer-led recovery
- 6 December 2013
- From the section Business
On the Office for Budget Responsibility's analysis of what's going on in the British economy, there is a bit of a mystery about why the recovery is happening now, as opposed to last year or next year or some other time.
What I mean by that is that the recovery has been driven, on the OBR's analysis, by households spending a good deal more than it and other economists anticipated.
But, says the OBR, this has happened at a time when growth in real household disposable income has fallen from 1.6% to 0.5% - which, for what it's worth, is less than the growth in the real aggregate spending power of the household sector in the immediate post-Crash years of 2009 and 2010.
And, of course, these aggregate numbers paint a misleading and too rosy a picture of what's been happening to living standards for most British people; according to official figures, median or typical household income for those who haven't retired has fallen 6.4% since the 2008 debacle.
However the OBR's real household disposable income calculations and forecasts are a guide to the direction of travel, and the point is that 2013 is a year of slowdown in the recovery as it affects people.
Which begs the question why on earth we are spending more.
You know the trite answer: we are saving less.
The ratio of people's saving to income, according the OBR, is falling from 6.8% last year - which some would see as a healthy rate - to 5.7%.
Let's be clear: 5.7% is still pretty high compared with the negligible saving we did in the boom years. But given households' still massive indebtedness - more than £1.5 trillion, equivalent to more than 140% of available income - many would argue that the rate of saving is on the cusp of being inadequate.
So the fascinating question is why are we saving less.
Now it is true that the very high 143% current ratio of gross household debt to income is down from an eye-watering 169.9% peak in 2008, with the fall largely due to the impact of inflation on nominal wages.
Maybe, therefore, households on the margin feel a bit less financially stretched than they did.
But the picture of individual indebtedness is not pretty: the debt is unevenly distributed, and somewhere between 5m and 9m households would struggle to keep up the payments if interest rates were to rise to anywhere near levels regarded as normal in the UK.
What therefore has been the trigger for the incremental spending?
Could it be the revival in the housing market, which has seen prices surge in London and the South, and stabilise elsewhere - such that people feel a bit more confident about their individual net wealth?
Could it be the Funding for Lending scheme, which has increased the flow of credit to the household sector and cut its price, though hasn't yet achieved the same for businesses? If it is Funding for Lending, then the turning down of this tap for households next year could be significant.
Could it be the very loud noises made over the summer by the new governor of the Bank of England that interest rates aren't going to rise any time soon, his famous - or perhaps notorious - forward guidance?
Or could it just be that there haven't been any huge economic or financial calamities in the world since the near meltdown of the eurozone at the end of 2011, and we've just forgotten that many of the structural economic flaws here and abroad are yet to be fixed.
For what it's worth, my hunch would be that the Bank of England's half promise not to increase the cost of money played a big role - on the totally unscientific basis that the question you ask me more than any other is what is going to happen to interest rates.
Which would imply that any hint that interest rates are set to rise soonish could stop the recovery dead in its tracks.
And another thing.
The OBR is forecasting GDP growth of 2.4% next year, 2.2% the year after, and then 2.6%, 2.7% and 2.7% in 2018 - which would be a proper recovery, though growth considerably less than we enjoyed between 1992 and 2008.
Now that recovery is based on households continuing to reduce the amount they save, to 4.3% of income by 2018, and pushing up their debts to more than 160% of income by then.
Will we want to increase our indebtedness in that way? Is it remotely sensible to do so?
There is an issue about the sustainability and quality of this recovery - and that's without debating whether the OBR is being too hopeful in its view of how British export markets may recover, and how business may break their habits of recent years and start investing again.
Most people would say, of course, that any recovery will do, after the long winter of recession and stagnation. But my goodness it matters that private sector companies follow the lead of consumers and start spending.