What happens when PPI cash runs out?

 
PPI form

There is more evidence today of the strength of Britain's recovery in the confirmation that the UK's car market last year returned to the kind of buoyant conditions not seen since before the 2007-8 crash.

There was a rise in motor sales of almost 11% to 2.26 million vehicles, according to the Society of Motor Manufacturers and Traders.

What has been happening? Consumers have been feeling more confident, credit is more readily available (around three quarters of private purchases are on credit) and PPI compensation payments have provided the few grand needed for the deposit.

Which brings me to one of my nagging worries about the UK's recovery (I have a few, as you know).

What happens when the PPI payments stop flowing?

In a very unorthodox way, PPI rectification has been a big money-creation exercise for the benefit of consumers.

Over 18 months or so, banks have paid out around £12bn to those mis-sold the credit insurance, out of a total that they currently expect to pay of £16bn.

It represents an economic boost equivalent to circa 1% of GDP - which is big. It is a bigger direct fiscal stimulus than anything either government has attempted since the crisis of 2008, involving more money for example than the temporary VAT cut of 2009.

That said, it is difficult to judge whether PPI compensation has been more effective in encouraging the recovery than quantitative easing, or Funding for Lending or the two phases of Help to Buy.

But those initiatives are qualitatively very different from the PPI stimulus - they all in effect pump mind-boggling quantities of cheap loans into the economy, or money that eventually has to be paid back, whereas PPI compensation is a handout of free, no-strings cash.

Or to put it another way, PPI compensation is as close as we've seen to what the economists call "helicopter money" - or the distribution of bundles of notes to everyone (or in this case, many millions of households).

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So PPI cash just might be the reason why the recovery here looks as though it was the fastest anywhere in the developed world during the last three months of 2013”

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Which is not to say that the PPI cash imposes no costs anywhere in the economy. To the extent that the payments have depleted banks' capital resources, it may have been a further suppressant of their appetites to lend.

But, as we know, this negative impact would have been marginal, because banks' desire to lend was already depleted.

Now what is interesting is the evidence that consumers are spending the cash, rather than using it to reduce debts. That at least would be a reasonable conclusion to draw from the recovery of sales of more expensive items, from cars to holidays.

In that sense, the PPI cash appears to have turned up at the economically most propitious moment, when consumers have tired of darning their socks (metaphorically speaking) and belt-tightening, and have decided they (we) deserve a treat.

So PPI cash just might be the reason why the recovery here looks as though it was the fastest anywhere in the developed world during the last three months of 2013, a touch faster even than in re-energised America.

But the PPI tap is now being turned down. The question is whether the economic momentum it has helped to generate can now become self-feeding and self-reinforcing.

It would, of course, be wholly inappropriate for the Treasury and the Bank of England to hope for the banks to play tooth fairy again, by compelling them to pay yet more cash to all of us in rectification of others of their past sins.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 275.

    Even if PPI is the explanation, it may not revert back to flat-lining post PPI, it's POSSIBLE that the stimulus to aggregate demand provided by PPI may be sufficient for the increase to become self-substaining - essentially PPI providing the kind of stimulus to aggregate demand that many said the Government should be providing to jump start the economy

  • rate this
    +1

    Comment number 274.

    273.IR35_SURVIVOR
    3 Hours ago
    #270 after watching Nick robertson the true cost on migration , think he better hope for a UK win at the next election
    ===
    UK win?

    What in the Eurovision Song Contest?

    Who is Nick robertson - unusual to see a surname spelt in lower case?

  • rate this
    0

    Comment number 273.

    #270 after watching Nick robertson the true cost on migration , think he better hope for a UK win at the next election

  • rate this
    0

    Comment number 272.

    When the PPI runs out people will just revert to paying on the never never, with zero interest rates here to stay for the likely next 12-24 months, I would like to see a rate rise but as we all know this is bwing kept low just as is the artificially high house prices, propping up the banks balance sheets.

  • rate this
    +3

    Comment number 271.

    The main cause of this depression is that economic insanity is lauded and has become the norm. There really is no way out of the economic hell hole if we continue digging.

    Interest rates (the price of money) MUST rise to a rational level (5%) BEFORE we can possibly return to economic stability - let alone growth.

    Zero interest rates destroy ALL money allocation (as do state subsidised workers).

 

Comments 5 of 275

 

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