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 367.


    That will likely be their downfall in due course, as it has been the West's. Hot-housing is elitist selection, and when you start down that path too many get left behind.

  • rate this

    Comment number 366.

    (Problems posting today... grrrr!)

    Fairsfair - correct. Democracy has failed because it has been superceded by economics. Economics is a pseudo-scientific justification of the status quo. Both have been hijacked by the rich. We live in a world where money talks and all else is silence(d).

  • rate this

    Comment number 365.

    343 Alan

    Jaguar/Landrover are great success stories but not UK owned. Investment was imported and control exported. Will future plants be built here or overseas?

    Many UK owned companies have exported jobs. We still have world class companies with solid jobs but not nearly enough.

    Regarding education I do not blame the young but some verge on illiteracy and a lot are nearly innumerate.

  • rate this

    Comment number 364.

    Yes & no!

    Perhaps none "completely wrong', but probably none completely right - or at least none of overwhelmingly persuasiveness yet with courage to enter the lists - and so all as far as we know simply 'wrong enough in aspects enough' to make us collectively "completely wrong" with respect to our economic relations and survival. Too many 'thinking' at best: leave it to luck

  • rate this

    Comment number 363.

    Spot on. The Greeks were amazing, 2,500 years ago.
    I suspect the Chinese hot-house top students specifically for international league table examinations in a similar way to their athletes and their performance bears no relation to the majority of students.
    Also I suspect they coach specifically for the exams which may not even be regulated properly.
    Complete lychees.

  • rate this

    Comment number 362.

    Just look how fast the Chinese became one of the top Olympic medal winners; I guess the Chinese would be a major winner of the Nobel Prize soon.

    Well, yes, the Roman and Greek empires-- one thing the Chinese never understand: how could a Greek say once they had a civilisation but what they could prove that as evidence nowadays are those half naked broken armed statues.

  • rate this

    Comment number 361.

    "Oh, two thousands ago, most European still lived on the trees?"

    The Roman and Greek empires disagree.

  • rate this

    Comment number 360.

    Hi Bob
    No. Pensions are a transfer payment from one section of society to another. They specifically are not double-counted.
    Well provisioned baby-boomer pensioner.

  • rate this

    Comment number 359.

    it's mostly a credit card led recovery

    mastercard increased my limit by £2000 !

    no corresponding increase in my income unfortunately

    they're trying to entice me (and others) to spend more

  • rate this

    Comment number 358.

    Damn, the Nobel Prize was established too late. If it was established 2000 years ago, the Chinese might have lost the count how many 'Nobel Prizes' they've won? Oh, two thousands ago, most European still lived on the trees?

    The Chinese just need a bit more time to catch up.

  • rate this

    Comment number 357.

    Nothing curious about it Robert.
    Our economy is based on people spending their money.
    If we stopped doing that.
    What do you think would happen to us?

  • rate this

    Comment number 356.

    All for All@353
    Are you not agreeing with me?
    Certainly the people who run the banks don't seem to know what they're doing.
    Perhaps the Rev. Flowers can assist.
    One college of Cambridge University - Trinity - has produced 3 times more Nobel laureates than China.
    It also remains unsurpassed in producing Russian spies.

  • rate this

    Comment number 355.


    We should stop looking up to people who have high levels of wealth and realise they have such wealth because they have high levels of greed. Greed is not good for the future of the human race but our cancer capitalism encourages it.

  • rate this

    Comment number 354.

    I am not an economist and this is a question. Are the figures being distorted by the monies now being released into the economy as pensions in payment made to the very significant numbers of well provisioned baby boomer pensioners?

  • rate this

    Comment number 353.

    alan @346
    "completely wrong"

    As you might imply @344, no part of the establishment - perhaps not even the odd rebel - 'understands banking' & its impacts to the extent that they might spell-out, to the satisfaction of all, such a range and catalogue of legal and illegal 'banking operations' that our collective knowledge might have saved us from the last disaster, or might save us from the next

  • rate this

    Comment number 352.


    The need for welfare is a symptom of the failure of democracy which is a contract with all citizens that he/she will be able to use his/her talents to earn a fair wage to support his/her family.

  • rate this

    Comment number 351.

    China has won 12 Nobel prizes and the UK has won 103.
    Hot-housing young people by drilling Mathematics into them obviously makes them quite dull and lacking in creativity..
    Gun powder and paper were invented a long time ago.

  • rate this

    Comment number 350.

    When the current tranche of QE started it because evident to me that many economics journalists knew nothing about it and thought it had never been done before.
    I wrote to Mervyn King about this and received a good considered reply.
    In fact it's always been a monetary lever available to the BoE.
    This is what happens when you have economics journalists who don't have economics degrees.

  • rate this

    Comment number 349.

    This recovery will last about 18 months, once again built on consumer based housing bubble.

  • rate this

    Comment number 348.

    I don't think talk of a real 'recovery' is valid. What I see, as a very small retailer, are depressed people fed up with austerity, pushing credit to the limit to have a bit of Christmas cheer.Things have picked up over the last 3 months a bit, but I predict new year Armageddon once the next big set of bills come in with a new raft of store closures. I don't want to see this but it is inevitable


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