Britain's curious consumer-led recovery

High Street shoppers

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%.

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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?

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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.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 27.

    I recall the late Peter Jay asking this question in the 80's and everyone else asking it ever since. It's how we do things here, apparently. If one really wanted to "rebalance" the UK economy, one could do worse than look at why we always seem to need consumer debt (and presumably therefore rather expensive debt) to start every recovery.

  • rate this

    Comment number 26.

    I always wondered if you have inflation of 4% and "growth" of 1% does this actually mean it's a contraction?

    Growth is after inflation. So in your scenario the economy is growing at 5%, but there is only a 1% benefit.

  • rate this

    Comment number 25.

    15. nicknack1 - Certainly you are priced out of the UK but we are now a global market of opportunity. Market data is available at the tap of a key and you will find property you can afford somewhere. It just won't be here. Remain, and you will slowly starve and freeze so as NT made plain decades ago, you know what your bicycle is for. Get real, buy a house in UK.... haha hehehe....

  • rate this

    Comment number 24.

    QE has reduced the value of money. People are looking at their dwindling savings thinking I may as well spend it now rather than watch it reduce to nothing over time. This is what happened in Brazil when they had rocketing inflation. The problem is how long will this last? The short answer is until peoples savings run out which from Gideon's view will do until the next election. Then start again.

  • rate this

    Comment number 23.

    If you rent you lose out, if you are in benefits you have lost out, if you are a pensioner you have lost on savings interest. But most people with mortgages will have gained and if they had spent during the last 5 years then they would have created jobs and growth. So why didn't they spend - because they were told to expect to lose their jobs. Hence media driven recession

  • rate this

    Comment number 22.

    Re: No 3.

    I wonder if it is also the retirement of relatively well-off baby boomers. I have been saving all my life for my retirement. I have now retired and am busily spending my money - after all that is what it was for. There must be many people in my situation. Is this significant?

  • rate this

    Comment number 21.

    #9 JfH see
    #12 OS yes currency is created as debt from thin air see
    total world debt v unlikely to be repaid probable world currency reset Can these debts be repaid? No one knows.

  • rate this

    Comment number 20.

    There is one economic forecast of which you can be completely confident - the forecasts of the OBR will be wrong. They have not got one right so far. So can anyone explain what the contribution was of austerity & public sector cuts to the current and forecast growth? Growth, even the non-sustainable variety we now see, is what will reduce the deficit but eliminate it just before 2020 election - no

  • rate this

    Comment number 19.


    1. QE - A sword waiting to fall
    2. False high House prices - more borrowing by Govt and lack of new homes.
    3. Businesses sitting on cash mountains
    4. Growth in many countries starting to drying up
    5. Bankers getting up to old tricks again - bonus for nothing
    6. No Ring Fencing of Banks
    7. Massive Trade imbalance
    8. Consumers spending savings

    OH 9 . Massive Dent

    but its working - FOR WHOM ?

  • rate this

    Comment number 18.

    Are we really in a TRUE recovery, or have savers simply decided that their money is becoming increasingly worth less and are spending it while it still buys things they might want?

    Most wages are still stuck at roughly 2008-9 levels, and the cost of living has increased at frightening rates

    When the savings are gone, what then for the 'recovery'?

  • rate this

    Comment number 17.

    I do not finally know but I suspect that the missing link in this
    confusion is the legislation that allows national banks to
    bail-in money from the deposits of their creditors.

    Already in place in the UK, U.S.A, Canada, New Zealand and
    in the pipeline for the Eurozone countries for 2016. They hope
    to hold the interest rise until then and hope to hit escape velocity.

    Pure Jules Verne.

  • rate this

    Comment number 16.

    There will be no growth of private sector investment which would divert money (capital) from wealth creation. Investment is no longer required and the saga of power station subsidies by government proves this. We are in a post industrial world where the cost of capital, all that matters, is 10% and increasing. Population increase has people in jobs for the sake of feeding themselves. Sad.

  • rate this

    Comment number 15.

    Whats the point in saving for a house etc if every single year the price of the house goes up by the same amount.

    Young people are realising their future is gloomy so might as well enjoy the present.

    I am saving approximately a third of my income only to still be miles away from the housing "market" and even when i get the deposit the monthly payment will be a struggle.

  • rate this

    Comment number 14.

    Fundamental cause of debt:
    - Buying more stuff than you sell

    Why buy more than you sell?
    - No choice since you don't make anything yourself any more.

    - Revive manufacturing.

  • rate this

    Comment number 13.

    10 "In 2007 my (mortgage) repayments were £600 per month, since then they have been around £70 per month."

    Good news for you Steve, but no such luck for renters. The rents just keep on rising.

  • rate this

    Comment number 12.

    One thing that intregues me is the notion of painless Quantitive Easing.

    Where does all the money come from?
    Is it just created as 1's and 0's electronically at the bank?
    Is there some intrinsic value to it, so it is based on something tangible.

    Will it have to be repaid?
    Will interest be added to any repayment?

    Or is the taxpayer just the scapegoat yet again for another tousling ?

  • rate this

    Comment number 11.

    loving 'celebrity in the jungle'
    a shining example of nonconsumption by a group of faketans eating only insects, rice and beans, no fuel bills and visits to Ant and Dec.
    Maybe its the effect of the faketan.
    Maybe if Parliament had a tanning booth....
    at least they would look like celebrities as they manage an economy restrained between a rock(low interest rates) and an hard place(stagnant GDP)

  • rate this

    Comment number 10.

    The economy is driven by people with mortgages. In 2007 my repayments were £600 per month, since then they have been around £70 per month due to the fall in rates. So we have no shortage of cash, just a lack of confidence. I imagine people are spending because they are bored with the rainy day that didn't come. Don't undermine confidence - you have to realise you are a cause of the recession

  • rate this

    Comment number 9.

    Consumers are spending savings!

    My guess is that the consumers have seen that the (idiotic) Forward Guidance tells of the end to the absurd extraordinary monetary pricing that has prevailed since 2008 and that they sense a rise in interest rates.

    What they haven't seen is the collapse of the banks as soon as rates rise - but which must happen so that we can genuinely escape the cul de sac of QE.

  • rate this

    Comment number 8.

    The idea of suceeding due to growth is clearly flawed, because it is like a Ponzie Scheme.

    Imagine I want to tax a person, but need to add a growth of 5% per annum on top of that to make my accounts sound like a wise investment.

    The following year I can no longer leave it at JUST 5% because we want 5% GROWTH.

    In a very short number of years there is not sufficient money in the circulation pool.


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