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
    +4

    Comment number 135.

    @120 alan Surely you mean dumbing-down? Caveat Emptor does not apply here and if it did, once the buyer has made known to the seller the particular purpose for which the goods are required, the law implies a condition in the ensuing contract that the goods/ service is reasonably fit for the intended purpose. If they could have found a way to blame the customer for this they would have done it.

  • rate this
    +1

    Comment number 134.

    120 alan "What happened to caveat emptor?"

    It was regulated away!

    The FSA and its predecessors placed the burden on the seller of financial products to establish the "suitability" of the product for their customer. This is not unlike having the checkout operator offering you apples in place of the biscuits you decided to buy.

  • rate this
    +1

    Comment number 133.

    120.alan

    "What happened to caveat emptor?"

    Consider what would happen to sales of (for example) TVs without a warranty. Would the result be good for consumers, manufacturers and the economy overall, do you think?

    Let's go further, shall we...

    http://www.bbc.co.uk/news/uk-25259505

  • rate this
    -8

    Comment number 132.

    The wrong recovery scaremongering goes on. Keep it up BBC.

  • rate this
    0

    Comment number 131.

    125.igooddriver

    I don't disagree, merely pointing out why people will on the whole adopt to splash the cash.
    We live in a spend & borrow as much as you can on everything World - since '08 banks & consumers now think there are no consequences to continued recklessness & when it all goes predictably wrong its the likes of your ISA Pot they'll be gunning for -ask yourself, whos the biggest mug?

  • rate this
    0

    Comment number 130.

    Grumpy@3
    Interest rates have nowhere to go but up, but the days of getting a real rate of return for a "safe" investment in a Building Society may be over.
    All savings and investment products carry a risk and if that risk is not carried by the saver but by the BS then the return will be modest.
    The only risk-free investment will be one paying a negative return in real terms IMHO.
    Alan

  • rate this
    +5

    Comment number 129.

    as per usual it’s the person in the street who is trying to do the right thing ends up carrying the can from the top and the bottom.

    honesty and prudence are redundent

  • rate this
    +3

    Comment number 128.

    We need something to keep the ambulance chaser companies busy. My picks will be....

    - Were you stressed in your job or treated badly by your manager?
    - Did your company mis-manage your pension?
    - Did your rail journey cause you unnecessary stress?
    - Were you upset by someone using a mobile phone near you?
    - Were you upset by someone asking you not to use your mobile phone?

    The list is endless.

  • rate this
    +1

    Comment number 127.

    Do you believe in magic?

    Perhaps we should stop kidding ourselves: there is no such thing as free money.

    Borrowed money that doesn’t generate sufficient profit to repay and service the debt is, by definition, unsustainable.

    The recession was telling us something; were we listening?

  • rate this
    +3

    Comment number 126.

    I don't care what George Osborne says, as far I am concerned there will be no economic recovery until real terms wages start to increase.

    Everything else is just smoke & mirrors & has no relevence to the average UK resident.

  • rate this
    0

    Comment number 125.

    @116

    1.) Obviously
    2.) Disagree - yes we have pathetic rates of return on savings but i still choose to use my full ISA allowance every year and save. Poor excuse to blow savings and increase personal debt!
    3.) again obvious... but what analyst see as interesting is, rather than using low rates to pay down existing debts... people continue to take out new debts... which is bonkers!

  • rate this
    0

    Comment number 124.

    Since the start of 2012, household expenditure on "durable goods" has been £1,500 million to £2,000 million higher each quarter than the same quarter a year previously.

    http://www.ons.gov.uk/ons/datasets-and-tables/data-selector.html?cdid=UTIB&dataset=qna&table-id=E2

  • rate this
    +3

    Comment number 123.

    Don't worry about the money running out. The capacity of our retail banks to shoot themselves in the foot is boundless. Something else will come along that needs large payouts.

    What people don't realise is that, eventually, the money does not come from the banks. It comes from the customers of the banks.

  • rate this
    +1

    Comment number 122.

    makes all those years saving for my next phone, computer or car seem foolish. i may as well had a live for today attitude and spent until I was bankrupt like half the population appears to have done.

  • rate this
    +2

    Comment number 121.

    113. correction PPI not PFI

    PFI is another drain on our economy thats gone Way out of control....

  • rate this
    -4

    Comment number 120.

    What happened to caveat emptor?
    If someone buys something which they don't need or is unsuitable surely it is their mistake?
    Why should the seller compensate them?
    The message is that if you are dim and enter into contracts without doing your homework then you will receive compensation.
    Perhaps we should all start "dumming-down" in order to be eligible for a big fat pay-out.
    Alan

  • rate this
    +3

    Comment number 119.

    Mike post 118. Totally agree 100%. There is and was nothing wrong with PPI insurance itself. The issue was banks forcing people to have it whether they needed it or not and whether they could claim or not because they earned huge commissions on its sale.
    People bought it because they were effectively told they had to have it and were told it would pay out when often it wouldn't.

  • rate this
    +2

    Comment number 118.

    Clearly, evidence exists to show that the product was mis-sold in some cases. That doesn't mean that insuring yourself against inability to repay loans is a bad idea.

    For the millions who made claims in my time in the insurance industry, it was a very good idea. They kept a roof over their heads.

  • rate this
    +1

    Comment number 117.

    weescamp@100
    Foreign Direct Investment creates jobs, investment and exports for the UK.
    It also creates extra jobs in the supply chain.
    Employees and employers pay taxes and NICs which provide money for the Exchequer.
    Some profits will be reinvested and some will go to shareholders, some of whom will be UK-based private investors and institutions.
    Alan

  • rate this
    +2

    Comment number 116.

    109

    Now what is interesting is the evidence that consumers are spending the cash, rather than using it to reduce debts

    1 - Wage increases haven't kept pace with price increases leaving people poorer
    2- Savings rates are pitiful so whats the point
    3- rigged interest rates keeps debt cheap

    just some reasons people will spend the money. Car sales are more to do with massive discounts

 

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