The first quarter...

Security issues might have averted our gaze, but some rather interesting statstics were relased this morning that more or less complete the picture we have of the economy in the first quarter of the year.

The two main headlines for me: real household disposable incomes (i.e. incomes after tax and inflation) fell for the second consecutive quarter. And (probably as a resuilt of that) savings collapsed to their lowest proportion of income since 1960.

Putting these in numbers, households were 0.3 per cent poorer in the first quarter of the year than they were three months before. And they saved a mere 2.1 per cent of their incomes. (It's not much if they aspire to retire on a reasonable income for a quarter of their adult life).

Consumer spending was robust, growing 0.5 per cent in real terms. The economy grew strongly, by 0.7 per cent in the quarter. It's three per cent bigger than a year ago.

How should we interepret the data?

It seems that the economy is still being to some extent sustained by consumers who are struggling to adjust to the fact that their spending power is not rising as fast as it was. They are still spending more even though their income has not been rising.

One wouldn't want to be too alarmist about this, but it slightly smacks of the cartoon character chased off a cliff - with the legs still running before the character finds the ground is no longer there and a fall is imminent.

The fundamental problem is that unless household incomes start rising quite fast again, some adjustment will surely have to be made to spending. Historically, we have saved about seven or eight per cent of our disposable income. A big economic question is how the economy will fare in the short to medium term, when we return to that normal level. (Alternatively, one might ask how on earth we would fare in the long term, if we didn't save at that normal level!)

The best hope for us is that real incomes improve, either through a large increase in our own producitvity and earnings, or through a fall in the prices we pay for things. Perhaps if the kind Chinese workers could supply us with yet cheaper goods, the adjustments that seem necessary would be more comfortable!

Comments   Post your comment

  • 1.
  • At 06:55 PM on 29 Jun 2007,
  • Chris S wrote:

I think rather than the spending power of your salary, the illusion lies in the real value of your property... Who needs to save when your property is doing it for you?

Whether you used over-inflated house prices as a justification for not saving, or even for "dis-saving" (equity withdrawal), I believe the real household balance sheets are soon going to become a great deal worse.

  • 2.
  • At 05:27 AM on 30 Jun 2007,
  • Alan North wrote:

The reality is that a fall in prices is only likely to make people buy more. Primarily due to the internet, the cost of entertainment goods has nosedived in recent years. Yet HMV are still showing record takings (if not profits) which suggests that consumers will keep on spending to the limit regardless of how much it actually buys them. House prices also seem to be following this pattern.

I think the days of strategic price corrections are behind us and it's time for some mandatory saving schemes (in addition to pensions). Of course people don't like to be told what to do, but the reality is that the vast majority of these people don't need to free up capital for short term entrepreneurial activities. People are selling out their long term security for some short term hedonism. With the profits of this behaviour going to straight to big business, it's no wonder that the gap between rich and poor is still increasing.

  • 3.
  • At 09:46 AM on 30 Jun 2007,
  • Tony Park wrote:

Surely the answer to how we will cope in the long term if we don't save will be that we don't retire. We'll carry on working until we drop, which is good for the economy, and in reality is the historical norm.

  • 4.
  • At 01:54 PM on 30 Jun 2007,
  • Daniel Curwood wrote:

Surely the issue of incomes not rising as fast or as much as they did previously, has a lot to do with the reluctance of this Government & the previous administration to control taxation on fuel & the lack of infrastructure in place for alternative fuels.
I think people in general have a harsh shock coming round the corner, in that they won't be able to spend as frivolously in the coming few years until inflation has been brought under control.
Economic growth is bound to fall as a result of this, & hopefully the fat cats at the Treasury & also at the fuel companies will realise we need investment in alternative fuels to rapidly increase, rather than walking away with ever larger bonuses.
The gap between the rich & poor continues to rise...

  • 5.
  • At 10:44 PM on 30 Jun 2007,
  • Deepak Chawla wrote:

On the other hand if you want a higher income to pay for your debts, that will also lead to wage-price inflation which we already see.
(Also discontent with public sector staff who got poor raises).

That would lead to higher inflation, Hence higher interest rates.

This will lead to higher interest rates on the borrowing. Hence demand for higher wages.

And the cycle continues for the common man...

  • 6.
  • At 08:35 AM on 02 Jul 2007,
  • Juan C wrote:

The causes of this are multiple. Rising house prices give some people an "illusion of wealth"(remember ony those downsizing or moving to other country benefit from this), others take on debt to the hilt in the hope that things "will sort themselves out". More generally a lot of people spend beyond their means to achieve a lifestile that some other people or corporations told them they "need" to have (Plasma screen TV, latest HiFi, cable TV, new car, the list goes on...)
I get about once a month letter from both my bank and my mortgage provider that I have "been pre-aprooved" for a "Low cost Personal loan". just sign in the doted line and all your dreams could come true..
Except that in my case they all end up un the bin (shredded). But I can see many people falling for this one as well. In part is due to the fact that now companies tell you how much you will have to pay per month regardless of much cheaper it would be to save and buy the thing outright.
When the day of reckoning comes many people are going to be stung, but will there be so many as to affect the whole economy???? Who knows...

  • 7.
  • At 10:25 AM on 02 Jul 2007,
  • nick l wrote:

However the problem comes in finding a way to increase household income. If you raise minimum wage yes people get paid more, however production costs of products increase, prices increase and as doesinflation, so the circle goes round. However China is now becoming more and more powerful and wants better conditions and products for its people and so the China effectis beginining to shorten, the bestway would be to find a new economy whcih is rapidly growing like China and Japan did that we can use like the china effect,

only question is:
where ?

Hi Evan
I know this is totally off the thread but I loved the profile in the ST - I never knew you were so famous or so interesting. Though somehow I guessed you might be a tad above average on the IQ front - after all it takes a rare talent to make economics both understandable and interesting. Keep up the great blog - it's always good to get your perspective.

Best wishes
Huw Sayer
PS: Hope the weather in the South of France is better than England at the moment.

  • 9.
  • At 08:14 AM on 03 Jul 2007,
  • Sarvinder Gupta wrote:

An interesting article from Evan Davis.

People are worse off. And the prospects don't look great either, with interest rates expected to rise this week and the City thinking rates could go up more in the autumn.

The public finances are showing some strain too. But it would be a brave chancellor to put up taxes.

As for China making cheaper goods, this isn't the case. Whilst some companies, and consumers, can still get one-off gains by switching production to, or importing from, China evidence suggests that prices and wages are rising in China now.

Finally, the illusionary wealth gains from house price inflation are likely to reverse, the combination of rising UK rates and a global tightening of credit could well cool the housing market in Britain.

So if we are, on average, worse off in 2007, the prospects for 2008 just look worse.

  • 10.
  • At 03:12 PM on 03 Jul 2007,
  • Mark Phillips wrote:

One of the offsetting facts is far more gifted and inherited wealth. Those high price houses are being passed on to the next generation. The very large increases in house ownership over the past 50 years is now cascading wealth down to the next generation. Many anticipate their good fortune while many 60 plus middleclass parents gift their children large sums especially when they trade down. Many children do not need to save for their old age; their parents and house inflation has done the job for them.

  • 11.
  • At 04:51 PM on 03 Jul 2007,
  • Nationalist wrote:

Most of our problems could be solved with a hefty interest rate rise. Borrowing would be less affordable and saving would be much more rewarding. And there would be less access to credit hence even more motivation to save for big purchases.

Flats trail houses.
Interesting to read your note on the price of flats. Looking at the number of vacant new build flats for sale and rent in Norwich backs up you analysis.

However, I can't help feeling that (aside from price issues) the lack of demand is due to the poor quality of the product. I am amazed at the number of flats that are billed as luxury and yet are very pokey with little natural light - little attention paid to views and a complete absence of outside space - not a balcony to be seen.

Well built, spacious flats that actually make a virtue of their height to command good views and that give people enough room to sit out for a glass of wine and maybe even a barbecue would suit most busy young families and could shift our perception of what a family home entails (it does not need to be a 4x4 house in a village).

In fact, I am currently looking for a house but would prefer a flat in the centre of Norwich if it could offer the same internal space and had a decent balcony or roof terrace.

Yes nick (#7) -where is the next country to exploit after China?

Wouldn't it be better (and perhaps esier) to build a more sustainable global economy? One which doesn't exploit the poorest countries for the sake of the rich. Riding the tiger is fun -but perhaps not very healthy in the long term.....

  • 14.
  • At 03:55 PM on 04 Jul 2007,
  • Andrew Sheldon wrote:

Is the number of households in the UK still increasing? A 0.8% increase in the number of households in the quarter would mean that spending fell in line with incomes. Might not be a complete explanation, but it probably needs factoring in.

  • 15.
  • At 05:12 PM on 04 Jul 2007,
  • Duncan Pratt wrote:

I think one of the major reasons for people not saving is the means-testing of benefits.
I'm a saver, it's in my nature but I've found that because I've saved some money I'm not eligible for tax credits, housing benefit and other financial assistance. If I had been irresponsible and spent all my money I would have had a good time and be eligible for state help now.
As I'm cautious I’ve been put in a lose-lose situation.

Recently my gran inherited some money, as this put her over the threshold for savings all financial help stopped, so she spent a load and gave some away. If she hadn’t in a year all that money would have been spent on rent and she would be back on state help for paying rent. There was no incentive for her not to go on a spending spree.

  • 16.
  • At 07:38 PM on 04 Jul 2007,
  • Dave H wrote:

£27bn is invested in property, yet household saving is at a record low. We are 20th in the world productivity league and 14th in the key area of financial services. Not too hard to work out what will happen to the economy over the next few years, is it?

Nationalist's rate idea is fine in principle, but the resulting reduction in current demand alongside reduced government spending - ie: the exact opposite of the Brown economic mirage - would crunch the economy, especially as confidence in property falls. Given relative debt levels, the whole situation is very close to the late 1980s - in 1988, Lawson was hailed as the great chancellor, by April 89, he was "this bankrupt chancellor".

  • 17.
  • At 01:28 AM on 07 Jul 2007,
  • Deepak wrote:

you make a vast over simplification - does the lower saving mean we are simply buying worthless consumer goods, or perhaps as we become a more financially sophisticated society we use other vehicles for saving - a second home, stocks, house extensions etc.

Lets face it, unless you're going to show the 0.3% drop in income in a relative or historical perspective, its a pretty meaningless statement.
I remain un-impressed with the two or 3 postings I've read of yours. Unfortunately for us, the bbc gives you a much larger audience than you would otherwise enjoy. Some people just like something that sounds reasonable rather than is researched or thought out.

  • 18.
  • At 11:57 AM on 24 Jul 2007,
  • Dale Gooding wrote:

There is a tradition in our economic thinking in that we will 'buy' our way out of trouble, and your report implies we're running out of money to do this. However, I think this is probably out of date thinking, in reality what has happened is the ever cheaper shop prices means the service sector is ripping everyone off - if shop prices increase then the service sector will have to cool. The net effect would be fairly minimal. No I think people are spending money that they have gained either in property investment or share/ISA's etc...and why not!

What we need is a more secure envirnonment for pensions!

  • 19.
  • At 08:29 PM on 04 Aug 2007,
  • Neil Murphy wrote:

"The public finances are showing some strain too. But it would be a brave chancellor to put up taxes."

SOME strain? they have been massively in debt for years. Brown will have to raise taxes or cut spending.

And this will become apparent when we hit an economic slowdown or recession, due in the next very few years. Then Brown's lies wil be truly found out. there is nothing in reserve to help the economy in a recession, so it will be a bust.

As for the chap from Norwich, I live there too, and wholeheartedlky agree, the 'luxury' flats for sale there are rubbish. Cramped, poorly built poor light, nothing to recommend them.

Overall, Brown needs to raise taxes to sort out the public finances, interest rates need to rise to reduce the credit financed boom. However, people need a fall in both to put their personal finances right.

Brown is to blame by engineering a credut financed economic boom, it will be followed by a bust as they all are.

  • 20.
  • At 02:31 PM on 10 Sep 2007,
  • jim evans wrote:

Dear Evan,
According to the banks they want the Bank of England to bail them out to the tune of £50, billion of tax payers money.GET STUFFED,
The traders on the stock market, insurance liablities, hegde funds and managed funds, have caused the problem, Let them pay up its their responsiblity.and if some go out of business so be it.
" I wonder what Chase Manhatten, Brown brothers and the Morgan Group will do"
IF! anything is going on they will be at the heart of it.NOT BRITISH TAX PAYERS THOUGH, ???

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