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 Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 15.

    We need to consider the other side of the equation. That £12 billion pay-out will of course affect the capital and lending position of the banks. To take a crude example, if the banks have a lending to capital ratio of 10 to 1, other things being equal, that's some £120 billion that cannot be lent. We should factor in other aspects - the banks will be able to claim CT relief on those payments

  • rate this

    Comment number 14.

    What happens when PPI cash runs out?
    Well, couldn't we sue the pants off the banks for fixing the interest rates for years (libor).

  • rate this

    Comment number 13.

    Well if helicopter money works so well, why not give a £1k rebate to every taxpayer in the form of a prepaid debit card. Instant influx of cash on the high street. Most of it will get recycled back to the government and everyone's a winner.

    Or the billions that it will cost bankrupt the country further & cause inflationary effects as extra magic money appears from nowhere.

    Worth a punt?

  • rate this

    Comment number 12.

    Temporary boost like when the first TESSA expired in the early 00's.

    This recovery seems to be passing more or less everyone I know and everyone they know by. Wages Stagnant. High Inflation. Part time / Undermeployment.

    A London Centric Housing Bubble caused by lack of affordable housimg on the supply side is not a recovery..

  • rate this

    Comment number 11.

    Reminder if we need it that the UK. economy is maxed out

    The Uk government have reached their "credit limit"
    The UK consumer has borrowed to the hilt.
    UK Retail is open 24/7
    Borrowing costs can´t go much lower.
    The pound has been devalued through QE
    The "family Silver" has all been privatised
    Most economic leavers have been pulled

    If PPI has saved the economy then we are in a poor place indeed

  • rate this

    Comment number 10.

    What about the £20-odd billion of cash coming into the UK economy around March from the Vodafone/Verizon deal; that should tide things over for another while? Who needs to make anything?

  • rate this

    Comment number 9.

    I went to buy a new car recently and found that the dealer was more interested in selling me finance than the car. He told me that 75% of his customers took a finance deal and that I would get a better discount if I did likewise so would be a fool to not do so. I pointed out that his 6.5% interest was much more than the 1.5% I got from the bank on savings so I was cutting out the middle man.

  • rate this

    Comment number 8.

    "What happens when PPI cash runs out?"

    Simple, those annoying texts and phone calls will stop.

  • rate this

    Comment number 7.

    I've heard it mentioned before (by Robert) that PPI is fuelling the economy. Can that really be a major factor i.e. employment increases (part time mainly I know) are not the driving force?

  • rate this

    Comment number 6.

    PPI payments are not "helicopter cash" because they are not new money; they are a re-distribution of existing cash. That does not mean that they have provided no boost to the economy, but to understand their effect (and the effect of their coming to an end) you have to consider what the cash would have been used for if it had not been paid out.

  • rate this

    Comment number 5.

    When PPI starts to run out the banks will then have to start to pay out to huge numbers of small businesses who were miss sold inappropriate products or forced into swaps and other cons. The next stage of recovery will be small businesses no longer having the boot of the banks on their throats and actually some cash to invest.

  • rate this

    Comment number 4.

    I too have my doubts about the "miracle" recovery. Have we suddenly become a major manufacturer akin to China? Is everybody working in high skill high wage jobs ? Is the country becoming less indebted is the £1.4 trillion national debt paid off ? No we are just building more unaffordable houses aided by cheap money from the banks. Watch what happens when interest rates go up as they will.

  • rate this

    Comment number 3.

    Put interest rates up and I will spend. My life savings are going out of the window to pay someone else's mortgage. Nobody paid my mortgage for me even when rates went up to 15%. Stop this theft now, raise interest rate,, then deal with the non payment of all the debts. Then we will achieve a recovery, but little will change whilst we still have yet another left wing liberal at the BOE.

  • rate this

    Comment number 2.

    PPI was sold to the gullible & generally to suckers who will always be an easy mark for the crooks & vagabonds of the commercial World. Their inability to control their expenditure was never dependent on rational decision making ( if I don't have the money, I will not buy it) I doubt if the cash has had any effect except on the bigger rogues who duped the group into claiming for others!

    So no!

  • rate this

    Comment number 1.

    PPI, Help to Buy, ultra-low interest rates - this is about as far as you can get from a "real" recovery based on productivity, investment and exports!


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