Is the UK mending fast enough?

 

Robert Peston finds out whether people are starting to see over the top of the UK's debt wall

You may remember that for some years I have been highlighting research by the consultants McKinsey that shows - inter alia - how the UK has been neck and neck with Japan as the most indebted of the world's biggest economies.

Well because there has been controversy about whether the UK's current recovery is dangerously and unsustainably debt-fuelled, I asked McKinsey if it could update its analysis.

The results are striking.

They show that the indebtedness or leverage of the UK economy is falling, which most would regard as good news. Economic growth in the UK is happening at a time when the finances of households, businesses and banks are being strengthened (although, to state the obvious, the indebtedness of government continues to rise).

But this strengthening of what you might think of as the nation's balance sheet, this reduction in indebtedness, is perhaps not happening fast enough - in that the UK still has the dubious privilege of being a world leader for indebtedness, and any significant and unexpected increase in interest rates would be highly damaging.

According to the updated analysis, the UK's total debts - the aggregate of household debt, business debt, banking or financial debt and government debt - was equivalent to 484% of GDP, or national output, towards the end of last year.

Only Japan was more indebted, with debts equivalent to 514% of GDP, among a group of 10 rich large economies.

No real surprises there, given the huge size of the UK's banks and financial sector relative to our economy.

The UK would have had to shut down its big global banks to reduce its debts to the 282% level of the US, for example (Germany's indebtedness as a percentage of GDP is 268%; for France and Spain the ratios are 354% and 408% respectively).

Banking debt cut

However, what will be seen as more cheery is that the indebtedness of the UK is falling - and quite rapidly.

Here is the trend.

UK debts as a percentage of GDP reached an all-time UK record of 502% as recently as the end of September 2012.

By the end of 2013, that debt burden had dropped to 471% - which many would say is still far too high, but the decline looks significant (by the way, if you are confused by my use of 484% earlier, that's because for the purposes of comparison with Japan and other relevant economies, McKinsey had to use slightly older data).

So what is going on?

Well there has been little change in the absolute amount of debt on the books of businesses and households (that is the amount in pounds, rather than the amount as a percentage of national output).

By contrast banking debt has fallen sharply, by more than £100bn in just over a year, and by more than the increase in government debt.

Also the denominator for measuring the debt burden, the value of GDP in money or nominal terms, has risen, while the total of all those debts has fallen a bit. Which in theory means that the debts are more affordable.

Houses Half the personal wealth of UK households is held in property

There are therefore positives and negatives in all this.

Perhaps what is most important is that the current economic revival cannot be seen as debt-fuelled - which means it should be more sustainable than would otherwise be the case.

The point is that households are saving less than they were, rather than taking on bigger debts. Right now, their debts are not becoming bigger relative to their incomes.

In fact household debts reached a maximum of 103% of GDP in the middle of 2009, and were 90% at the end of 2013.

Less salutary, perhaps, is the reduction in corporate debts - which have fallen from a peak of 110% of GDP in the first quarter of 2009 to 95% at the end of last year.

Some of that fall is a necessary and arguably healthy writing-off of reckless lending by banks to property companies.

But a good deal of it is an unhealthy reluctance of banks to lend to viable companies and an unfortunate reluctance of many companies to borrow to expand.

It is striking that the fall in the indebtedness of British companies since the 2008 crash and onset of the global recession has been considerably greater than for companies in any of the other major economies.

In the US for example, the relative indebtedness of companies is more or less where it was at the time of the crash.

That may mean British businesses and banks are now taking too little risk, having hitherto perhaps taken too much.

Housing bias

But if the direction of travel is broadly benign, is the UK travelling fast enough?

Or to put it another way, is the debt burden falling sufficiently fast, such that there can be confidence that there won't be a bit of a shock to the economy, as and when interest rates rise?

The answer to that is probably no.

Just to focus on households for a second, the absolute level of consumer debt (as opposed to debt as a percentage of income) is as high as it ever was - at £1.48bn. Any significant rise in interest rates would squeeze millions of people's spending power to a meaningful extent.

The contrast with the US is again instructive, and not desperately flattering to the UK - because the reduction in the indebtedness of US households as a share of GDP is twice the UK fall.

That said, and for what it's worth, there are two rich countries, Australia and Canada, where consumers are even more indebted than in the UK.

Of course, when assessing long-term economic strength, it is also important to look at assets, as well as debts.

But there again, McKinsey's figures don't put the UK in a particularly attractive light.

In the US, the wealth of households is almost equally divided between property (homes), shares, life insurance and other investments. Or to put it another way, Americans don't have too many of their nest eggs in just one basket.

In the UK, shares are just a 20th of savings - and (guess what?) property is 50% of personal wealth.

So although the UK's finances are improving, if you believe there is something of a housing bubble here and that interest rates are set to rise sooner rather than later, then you would fear that Britain's balance sheet is perhaps not being strengthened fast enough.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

Is Osborne right that a smaller state means a richer UK?

George Osborne has firmly established the size of the state, and government benefits, as the central battleground for the general election.

Read full article

More on This Story

Comments

This entry is now closed for comments

Jump to comments pagination
 
  • rate this
    0

    Comment number 648.

    @647. All for All "In our fear of 'all loonies now', the beginning of wisdom?"

    Let us hope. Some of us will not now borrow more than we can afford to buy things we don't need that distract us from that which we had better contemplate.

    Good night.

  • rate this
    0

    Comment number 647.

    Grounder @646
    "cautious optimism"

    In our fear of 'all loonies now', the beginning of wisdom?

    Goodnight!

  • rate this
    0

    Comment number 646.

    @645 All for All "Doubts let in the loonies."

    Were there non-loonies standing in 2010? Yours must be a more well-favoured constituency than mine.

    I would not presume to describe my responses to 0racle as "authoritative", but your kind words are appreciated. And there have been some modest reforms, though none that should fill us with more than cautious optimism that further reforms may be ahead.

  • rate this
    0

    Comment number 645.

    AfA @643
    Misdirected
    Apologies to Wiltshire_Lad

    My apologies also to Oracle @641 - I should have waited for Grounder to appear, authoritatively, @642.

    Good for us that back in 2008/09 we'd a government that knew what it had to do for normal recovery (2-3 years of re-grouping). Opportunity missed for reform against recurrence. Doubts let in the loonies.

  • rate this
    0

    Comment number 644.

    @641 0racle

    In general, insurance companies and pension funds will have increased their holdings because lower yields mean they need larger holdings to generate a given level of income. Banks will have increased theirs because it's better to get interest on your reserves than not to, and additional lending would require additional capital that they do not have.

  • rate this
    0

    Comment number 643.

    Wiltshire_Lad@641
    "debt
    owed
    why?"

    Global crisis (s-p) hit confidence & credit ('capital strike') & tax receipts. How to fund ordinary govt spending & rising benefits & bank bail-outs ('too big to fail')? Solution: risk market insult by 'printing money' (BoE) &/or borrow from markets, sell bonds for redemption 'one set day', until then paying yrly 'tokens of appreciation' (hefty if future dodgy).

  • rate this
    0

    Comment number 642.

    @641 0racle "Most of the this debt (deficit 1.5 trillion) arose after the crash and bail out, so how much of this debt is owed to institutions and why?"

    Insurance companies and pension funds have increased their holdings by 50% (£120bn) while foreign holders have doubled theirs (£200bn). Banks have added £100bn to their holdings (in addition to the BoE's £375bn). That's most of the extra £800bn.

  • rate this
    0

    Comment number 641.

    640.Wiltshire_Lad

    No, what I am trying to do is understand how we (govt) can (after the BoE bail out the econ and banks [which had been creating money out of thin air] by the BoE apparently creating money out of thin air) owe money to institutions? Most of the this debt (deficit 1.5 trillion) arose after the crash and bail out, so how much of this debt is owed to institutions and why?

  • rate this
    -1

    Comment number 640.

    638.0racle

    Presumably these foreign entities etc would have lost great sums of money if govts hadn't bailed out the financial institutions and poured made up money into the econ
    ====
    surely you are talking about money owed by HM Government not financial institutions, but top marks for persistence.

  • rate this
    0

    Comment number 639.

    @638. 0racle "Presumably these foreign entities etc would have lost great sums of money if govts hadn't bailed out the financial institutions and poured made up money into the econ"

    Probably not. Monetary easing translated into a windfall gain to existing holders of UK debt, which they were able to realise by selling the debt to the Bank of England... But what would they do with their Sterling?

  • rate this
    0

    Comment number 638.

    635.Grounder "For central government debt, stripping out the Bank of England's Asset Purchase Facility, you end up with 41% owed to foreign entities, 36% owed to insurance companies and pension funds,and 12.5% owed to banks (MFIs)."

    Presumably these foreign entities etc would have lost great sums of money if govts hadn't bailed out the financial institutions and poured made up money into the econ

  • rate this
    0

    Comment number 637.

    636. Wallington man "do the full job, release latest Public Sector debt as % of GDP, not just Private Sector."

    PSND excluding the temporary effects of financial interventions is 75.8%, up from 74.2% (Table 1); PSND including the temporary effects of financial interventions is 132.4%, down from 137.5% (Table 5)

    http://www.ons.gov.uk/ons/dcp171778_360531.pdf

  • rate this
    0

    Comment number 636.

    2008 McKinsey said UK Public Sector debt was 52% of GDP, lower than Canada, USA, Germany, Italy, France & Japan. But Private Sector debt at 328% GDP was higher than any. Yet Cameron/Osborne chose to cut Public, not Private Sector debt - a political choice. Robert, do the full job, release latest Public Sector debt as % of GDP, not just Private Sector.

  • rate this
    +2

    Comment number 635.

    634. 0racle "Has anybody actually got any evidence of who we owe the money to?"

    Please see my comment at 517.

    For central government debt, stripping out the Bank of England's Asset Purchase Facility, you end up with 41% owed to foreign entities, 36% owed to insurance companies and pension funds, and 12.5% owed to banks (MFIs).

  • rate this
    +1

    Comment number 634.

    630.Wiltshire_Lad

    So you are saying (what I asked originally) that we owe it to the rich who should have gone bankrupt if it hadn't been for our govts bailing out their financial institutions?

    Has anybody actually got any evidence of who we owe the money to? That is the money the banks made out of thin air before they went bust and the money the BoE made out of nothing to prop them and econ up.

  • rate this
    0

    Comment number 633.

    Considering only those under 16 living in households with net wealth below £50,000:

    In the South East, this is 22%; in London it's 41%; in the South West it's 26%: in the North West it's 37%; in the East of England and Scotland it's 27%; in the North East it's 35%; in the East Midlands, Yorkshire & the Humber it's 29%; in Wales it's 32%; in the West Midlands (and GB as a whole) it's 30%.

  • rate this
    0

    Comment number 632.

    Just wait until UK leaves EU and gets no help from EU. Of course, even if in EU, if Germany can see a chance to exploit UK debt, it will and will do so crucifyingly. Best for UK in EU, but where the EU becomes a mediator between member states and EU rules. The other scenario is for UK in EU and Germany out of it. DR never worked with the idea of solidarity and UNION anyway.

  • rate this
    0

    Comment number 631.

    "Is the UK mending fast enough?"

    Household debt offsets household wealth. It is not the absolute volume of debt that is relevant but the proportion of households with net debt or near-zero wealth. Aggregate household financial assets amount to around £3tn and property wealth amounts to around £4tn, close to 2007 levels in real terms, but without data on the distribution, "mending" is uncertain!

  • rate this
    0

    Comment number 630.

    626.0racle

    If we owe our debt to ourselves (what a mad world) why can't it be written off?
    =====

    of course we don't owe it to ourselves literally. When people make that sort of statement they mean the government owes the debt to people and institutions in the same country (and sometimes the central bank has temporarily bought some securities through QE).

  • rate this
    0

    Comment number 629.

    Grounder @628
    "no prospect"

    No near prospect of 'universal' education, socialisation for democracy, but absolutely NO prospect of viability - EVER - in any system or outcome of inequality, even of agreed between 'powerful' leaders. If our forebears had waited for 'all to think together', in science & technology, in freedom & justice, in argument & protest, where would we be 'before the law' now?

 

Page 1 of 33

 

Features

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.