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
    +2

    Comment number 55.

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

    I didn't (don't) get it....

    Never had a loan.
    What is this PPI money anyway....£12BILLION....
    Money helicoptered in to the masses...
    Not Me.

    Have I missed out.?

    £12BILLION is a small percentage of the £350BILLION Q.E.

    DEBT is still DEBT.

  • rate this
    +14

    Comment number 54.

    48. If taking advantage of dim witted adults was a criminal offence then the prisons would be full of Politicians. In most cases the misselling was to people who signed up to PPI without thinking, or in some cases they genuinely wanted it. A bit like Tesco saying do you want a 4 pack of beans on offer for £2 or a tin for 35p. Misselling by Tesco or not; or just idiots who buy the 4 pack?

  • rate this
    +1

    Comment number 53.

    46.m

    Stupidity is not a crime.

    McDonalds warns customers that coffee is hot for a reason. Personally I would rather snigger at the implication than hear about horrible injuries.

    Even the brightest of us have been victims of cons, but we are still victims. Rather than blame victims in each separate scenario, we'd all benefit by acknowledging that fact.

  • rate this
    +1

    Comment number 52.

    24Truth logic sustainabilitythe finalfrontiers
    #Biggest direct stimulus boost to UK economy has been low mortgage rates, which enables £18 + billions of extra expenditure a YEAR#

    There is zero stimulus by low rates, zero extra money in economy. Every penny gained by the few in debt is lost by vastly more in received interest, low pension annuities etc. debt paid off is not being spent in buying.

  • rate this
    0

    Comment number 51.

    Banks-again?

    15th Precinct-Peston Room:
    Callahan "OK Banks,with your rap sheet it's 5 to ten years.Your luck just ran out,punk."
    Sipowicz "Harry, the skels deserve a tune-up but they've got rights."
    Callahan "I'm all broken up about their rights-Vic, take over."
    Banks "What's this,good cop,bad cop?"
    Vic "Nah,I'm a different kind of cop-the sort that unplugs the monitor first." (clunk!)

  • rate this
    0

    Comment number 50.

    "PPI compensation is a handout of free, no-strings cash."

    Not so: the 8% simple interest is taxable. In my case, that temporarily made me a higher-rate taxpayer.

  • Comment number 49.

    All this user's posts have been removed.Why?

  • rate this
    +2

    Comment number 48.

    It really is time that the Finance Directors / Legal Execs and associated bods in the senior echelons of the Finance Industry from 1987 - 2007 who were involved in the sign off of this fraudulent activity are brought to collective justice.


    This was nothing more than theft by Leeches.

    As usual the taxpayers have picked up the tab.

  • rate this
    +2

    Comment number 47.

    41.S

    "The changes in income tax will put far more money in peoples pockets than PPI."

    These changes?

    http://www.hmrc.gov.uk/rates/it.htm

    Note (1) personal allowance increase essentially matches real inflation, and (2) the lowering of the higher rate threshhold (even considering the personal allowance), dragging more people into that band.

  • rate this
    +16

    Comment number 46.

    "33. ComradeOgilvy
    There're some surprise posts here blaming the consumer rather than seller. Why?"

    Because, Comrade, the Banks sold exactly what they said they were selling. It was not a faulty product, but a mis-sold product, to people who were not smart enough to work it out.

    The PPI compensation process is basically proof that con artists abound and the consumer can be pretty stupid.

  • rate this
    +17

    Comment number 45.

    When PPI runs out there will be a lot of parasitic lawyers out of a job.
    Maybe they should all emigrate to Romania?

  • rate this
    +4

    Comment number 44.

    the discrimination against homeowners v buytolet landlords...why is the interest on the latter's mortgages taxfree? If I could just get the Lawlords to judge this is unfair,I could create a whole new compensation industry allowing homeowners to claim back tax on their mortgages.
    Drawback
    1 the govt would have to payout no chance
    2 I would have to use legal aid to fund my cases up to Lords....

  • rate this
    +12

    Comment number 43.

    PPI yet another massive bonus for the irresponsible, debt loving, free spending idiots out there. It's about time the political parties started treated people as Grown Ups and made them responsible for their debts. If you sign a contract it's your issue, if you don't want insurance just say No.
    Grow up and stop expecting the state, business, tax payers to wipe up your mess. Nothing is free!

  • rate this
    0

    Comment number 42.

    "What happens when PPI cash runs out?"

    We move onto LIBOR interest rate fixing compensation?

  • rate this
    +4

    Comment number 41.

    So the payouts averaged £660 million per month - which I calculate at 0.5% GDP rather than 1%. A massive amount of money, but hardly enough to create the recovery.

    The changes in income tax will put far more money in peoples pockets than PPI.

  • rate this
    +1

    Comment number 40.

    Rbert this is just speculation. Is there a survey that links PPI to car purchases? I read the FT article and not one shred of evidence was offered.

    Also, I would say the 170 BILLION (11%) deficit Brown ran in 09/10 was a pretty big stimulus!

  • rate this
    +5

    Comment number 39.

    The rebalancing of the UK economy is happening more quickly than I expected.
    Major investments and new job creation have been recently announced by Jaguar/Landrover, GSK, Bentley, Bombardier aerospace, Rolls Royce Aerospace and others.
    These businesses export most of their production.
    They are not dependent on domestic demand.
    Full marks for Vince and George.
    Alan

  • rate this
    +3

    Comment number 38.

    I am sick of PPI "repayments"

    Lets say what it is - a small minority strong-arming the banks

    I have "lawyers" constant emailing/texting etc trying to get me to claim the "money owed me" yet I know I am owed nothing because I never bought PPI!

    I know many people who got PPI on a loan, thinking they would be made redundant, and now got all the money back. How is that fair?

  • rate this
    +3

    Comment number 37.

    I fear that the stupid people who fell for PPI in the first place are hardly the people to trust to push the economy in the right direction, no doubt quickly spending their money on more Chinese trash

  • rate this
    +3

    Comment number 36.

    Yes PPI I suspected for some time was effecting the economy. Harming the banks that we have to rescue, so actually costing ordinary people to hand gifts to those that grasp PPI payments. Same effect with various bank fines.

    Still deliberately shovelling money at the wrong end of the equation, those in debt. When proper interest rates are the only right way to go. Yes collapsing the house prices.

 

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