Each month the Bank of England reports on the amount of net lending by households. This is the amount that households have borrowed from financial institutions (gross lending) less any repayments households have made to financial institutions. In March, net lending to households was £643 million, down from £2.43 billion in February. Of the £643 million, £318 million was net secured lending (i.e. mortgage lending) and £325 million net unsecured lending (i.e. lending through credit cards, overdrafts and general loans).
Now, you might think that net lending of £643 million means that the stock of debt owed by households grew by £643 million. Well, not quite; some debt is ‘written off’ by financial institutions. When bad debts are taken into consideration we find that the stock of debt actually fell in March by £2.682 billion to stand at £1.460 trillion. Of this stock of debt, £1.239 trillion is secured debt and £221.65 billion is unsecured debt. Put another way, 84% of household debt is secured debt and 16% unsecured debt.
One of the interesting developments of late has been the decline in the household sector’s stock of unsecured debt. It has now fallen for 10 months in a row and in 16 of the last 18 months. Interestingly, in only 7 of these months was net unsecured lending actually negative. However, historically low sums of net unsecured lending combined with the writing-off of unsecured debt has meant that the stock of unsecured debt has fallen by £14.975 billion over the past 18 months. Over the same period the total stock of debt increased by £2.379 billion.
Patterns in net lending by households and in the growth of the stock of household debt reflect, on one hand, the willingness and ability of lenders to supply credit and, on the other hand, the demand by households for credit. On the supply-side, the financial crisis continues to restrict lending by financial institutions. But demand has been affected too because households as well as banks are looking to rebuild their balance sheets. Furthermore, the economic downturn, lower asset prices, including, until of late, lower house prices, as well as a sense of economic uncertainty have all contributed to a more precautionary mind-set amongst households.
This precautionary mind-set has impacted on the housing market. Housing market activity can, at best, be described as ‘thin’. Even though the seasonally-adjusted number of mortgage approvals for house purchase rose by 4.3% in March to 48,901, this is almost half the 94,043 seen on average each month over the past ten years. A further demonstration of the household sector’s precautionary behaviour is the sector using housing as a vehicle for saving. We observed in our blog article Saving through housing: households build firmer foundations that since the second quarter of 2008 additional housing investment (i.e. money spent on moving costs, including stamp duty, the purchase of newly built properties or expenditure on major home improvements) has been greater than net secured lending. This is known as negative housing equity withdrawal (HEW). In other words, the household sector’s stock of secured borrowing has increased by less than we would have expected.
In the 12 months to the end of March, the stock of secured debt rose by only 0.9% compared with an average annual growth rate of 9.8% over the past 10 years. Of course this doesn’t mean that households have simply been using some of their own money to fund housing investment, but that they have also been paying-off some of their existing secured debt. This, coupled with the 4.3% decline in the stock of unsecured debt, demonstrates the extent to which the household sector has been looking to consolidate. It would be something of a surprise if this consolidation was to stop any time soon.
Articles
Weak mortgage lending set to undermine house prices Independent, David Prosser (5/5/10)
Mortgage lending down almost 90% from 2007 peak Guardian, Katie Allen (4/5/10)
Mortgage approvals still sluggish, figures show BBC News (4/5/10)
Mortgage lending stalls this year Telegraph, Harry Wallop (4/5/10)
Lending dip fuels house price fall fears Press Association (4/5/10)
Data
Lending to individuals Bank of England
Monetary and Financial Statistics (Bankstats) Bank of England (See Tables A5.1 to A5.7, in particular)
Housing equity withdrawal (HEW) statistical releases Bank of England
Questions
- What do you understand by the term net lending? What would a negative net lending figure indicate?
- Illustrate with examples what you understand by secured and unsecured debt.
- What factors might explain why the household sector’s net secured lending has been less than the amount of its housing investment (e.g. the household sector’s purchase of new houses or its spending on major refurbishments)? Does this mean that stock of secured lending has been falling?
- What factors might explain the recent historically low levels of net unsecured lending?
- Does net lending have to be negative for the stock of debt to fall? Explain your answer.
- As well as the household sector, which other sectors might need to rebuild their balance sheets? How might such behaviour be expected to impact on the economy?
The economic sentiment indicator for April 2010 published by the European Commission continues to show confidence in the UK economy rising. The UK experience mirrors that across the European Union. The increase in the level of confidence in the UK economy seen in April, as measured by responses to questions posed to businesses and consumers, was the fifth consecutive monthly rise in sentiment.
There is, however, something of a divergence between the moods of UK businesses and consumers. Consumer confidence fell very slightly in April, which follows on from a small fall in March. These falls might reflect some uncertainty amongst consumers induced by the UK general election and, in particular, the extent of future fiscal tightening. In contrast, general business confidence rose in April, especially in the construction and manufacturing sectors.
Nonetheless, confidence is considerably higher across both consumers and businesses than it was a year ago. The increase has been of such magnitude that the economic sentiment indicator has now been above its long-run average for two months in a row. We would perhaps be rather naïve to expect this trend to continue, not least because of the financial rebuilding that households, banks, business and, of course, government will be pursuing. Therefore, it will be fascinating to see how enduring the current levels of confidence are and whether the slight weakening in sentiment amongst UK consumers is a sign of things to come.
Articles
Euro-zone economic sentiment rises in April MarketWatch, William Watts (29/4/10)
EU economic, business sentiment indicators ‘improving’ – poll Sofia Echo, Clive Leviev-Sawyer (29/4/10)
Euro economic sentiment up in April France24, AFP (29/4/10)
Data
Business and Consumer Surveys The Directorate General for Economic and Financial Affairs, European Commission
Consumer Confidence Nationwide Building Society
Questions
- Why might the trends in business and consumer confidence be diverging?
- What do you think economists can learn from tracking the patterns in economic sentiment?
- What factors do you think are likely to impact on the sentiment amongst consumers and businesses in the months ahead?
Taxpayers may actually be in profit by several billion pounds, following reports from Lloyds that their profits are up in the first three months of 2010. At current share prices, the taxpayers are in profit by approximately £2 billion and this figure is expected to rise, as share prices continue to rise. Lloyds is 41% owned by the public, after a £17 billion bail-out rescued the debt-ridden bank. These profits follow two years of losses by Lloyds TSB and HBOS of over £6 billion in 2008 and 2009.
So, what has caused this change in fortunes? First, there has been a fall in the number of loans, which have gone bad. The bank said, “In our wholesale division, the level of impairments has been significantly lower than the last quarter of 2009 and is also at a lower level than our initial expectations for 2010″. Second, there has been a widening gap between the interest charged on a loan and the interest paid to depositors. However, despite this good news, this bank (and others) are still not lending enough to stimulate economic growth. Furthermore, as Lloyds still remains heavily dependent on loans both from British and overseas taxpayers, it could be some time before taxpayers see any return on their ‘investment’.
Lloyds: Black is the colour of spring BBC News, Peston’s Picks, Robert Peston (27/4/10)
Lloyds Banking Group returns to profits Guardian, Jill Treanor (27/4/10)
Lloyds profits revive as bad debts imorive Reuters, Edward Taylor and Clara Ferreira-Marques (27/4/10)
Lloyds Bank returns to profit Telegraph (27/4/10)
Lloyds and RBS shares to rise to give taxpayer potential £9bn profit Guardian, Jill Treanor and Larry Elliott (26/4/10)
Questions
- How have fewer bad debts and different lending and saving rates contributed to rising profits for Lloyds?
- If profits are back up, why are British banks still not lending enough?
- What factors will determine when the taxpayers actually see the return on their ‘investment’?
- In the Guardian article, ‘Lloyds Banking Group returns to profit’ what does it mean by “The bank did not change its earlier guidance that it expected to achieve £2bn of synergies and other operating efficiencies from the HBOS takeover by the end of 2011”?
- To what extent is the news about profits at Lloyds Banking Group and RBS a useful tool for the government in the upcoming election?
- Why is it so important that banks begin to increase their lending? What will determine the size of the effect on GDP of any given increase in lending?
On 21st April the IMF published its latest World Economic Outlook. It forecasts that the output of the world economy will grow by 4.2% in 2010, following last year’s 0.6% contraction, and by a further 4.3% in 2011. However, the Foreword to the report identifies considerable economic uncertainties. In particular, it identifies ‘fiscal fragilities’ and, hence, a ‘pressing need’ for fiscal consolidation. But, it also points to the need for policies ‘to buttress lasting financial stability’.
The IMF notes that Europe has come out of the recession slower than other parts of the world. For the EU-27 it is predicting growth of 1.0% this year, following a contraction of 4.1% last year, but with growth remaining at 1% in 2011. The UK is forecast to grow by 1.3% this year, following a contraction of 4.9% last year, and by a further 2.5% in 2011. Therefore, economic growth in the UK is forecast to be stronger than that across the European Union in both 2010 and, in particular, in 2011.
If we look at the expected growth in some of the principal components of the UK’s aggregate demand we see signs of a ‘rebalancing’. Firstly, household spending, which contracted by 3.2% last year is expected to rise by 0.2% in 2010 and by 1.4% in 2011. Secondly, general government current expenditure, which grew by 2.2% last year, is forecast to grow by 1.3% this year but, as the expected fiscal consolidation kicks in, will fall by 1% in 2011. Thirdly, gross fixed capital formation (capital expenditures) which fell by some 14.9% in 2009 is forecast to fall this year by a further 2.6%, before growing by 4.7% in 2011.
Report
World Economic Outlook, April 2010 IMF
Articles
IMF Raises 2010 Growth Outlook, Says Government Debt Poses Risk Bloomberg Businessweek, Sandrine Rastello (22/4/10)
GDP figures: what the experts say Guardian (23/4/10)
IMF cuts UK forecast in blow to Gordon Brown The Telegraph, Angela Monaghan (22/4/10)
IMF maintains U.K. 2010 forecast at 1.3 per cent Bloomberg, Svenja O’Donnell (21/4/10)
Global recovery faster than expected, says IMF BBC News (21/4/10) )
IMF nudges up world GDP view; fiscal fears mount Reuters, Lesley Wroughton and Emily Kaiser (21/4/10)
Data
World Economic Outlook Reports IMF
World Economic Outlook Databases IMF
For macroeconomic data for EU countries and other OECD countries, such as the USA, Canada, Japan, Australia and Korea, see:
AMECO online European Commission
Questions
- What economic uncertainties do you think might affect the forecasts of economic growth for both the world and UK economies? Would you expect these uncertainties to be less or more significant in the UK?
- What do you understand by the term ‘fiscal consolidation’? Why do you think the IMF are highlighting this as a concern?
- Why do you think growth across Europe has been lagging behind other parts of the world? What might explain why growth in the UK is expected to be above that across Europe over the next two years?
So how are you feeling? Is now a good time to shop? Or, is it perhaps time to put money aside for that rainy day? Well, these types of questions capture the essence of what we might label as ‘sentiment’ or ‘confidence’. Polling organisations each month undertake surveys to try to measure sentiment amongst consumers and businesses. In doing so, they ask questions relating to, amongst other things, perceptions as to the current and future states of the economy, the labour market and finances. The responses to these individual questions are then combined to give an overall indicator which, it is then hoped, can be used to track sentiment over time. Two widely reported surveys of sentiment are the EU economic sentiment indicator and the Nationwide Building Society consumer confidence indicator.
The Nationwide’s indicator focuses solely on households. Its sentiment figure for March suggests that the gains in confidence amongst households enjoyed in the first couple of months of this year have been lost. In other words, the decline in March was significant enough not only to wipe out the effect of the typical ‘January bounce’ seen in most measures of sentiment but also the further rise that occurred in February. Nonetheless, consumer sentiment remains above the levels seen through much of 2008 and 2009 amidst the economic downturn.
The European Union’s economic sentiment index measures sentiment across both households and firms, although separate indicators are available for households and for different sectors of industry. Figures are also available for each individual EU country as well as across the EU. 2009 saw a record low score in the UK for the economic sentiment index – a series which goes back to 1985. But in March 2010 the sentiment index was, perhaps surprisingly, above its long-term average. Interestingly, this reflects further strengthening in sentiment amongst businesses, while sentiment amongst consumers fell slightly in March after recent gains.
So what should we read into these sentiment indices? Well, firstly, consider the patterns in the sentiment scores. The sentiment indices rose markedly in the second half of last year and into the beginning of this year, although sentiment amongst households may have now weakened while continuing to rise amongst firms. Now, secondly, consider these patterns alongside evidence which shows that economic sentiment indices tend to track the direction of economic growth. So last year, the rise in both the EU and Nationwide sentiment indices was indeed mirrored by improvements in the rate of economic growth with initially smaller contractions followed by positive growth in the final quarter.
One of the advantages of these sentiment measures is their timeliness. The first provisional estimate of growth in Q1 2010 is not available until the end of this month and, of course, is then subject to revision. But, if we reflect on the sentiment measures, the fact that sentiment appears no weaker across the first quarter of this year as a whole and, when measured across both households and firms, may actually be higher, indicates that the growth number for the first quarter of this year may not be too different from the 0.4% growth recorded in Q4 2009. Stay cheerful!
Articles
Consumer confidence has sharpest fall this recession The Times, Grainne Gilmore (15/4/10)
U.K. consumer confidence fell in March The Wall Street Journal, Paul Hannon (15/4/10)
Election drives down consumer confidence Sky News, Adam Arnold (15/4/10) )
Consumer morale suffers biggest fall since July 2008 Reuters UK (15/4/10)
Data
Business and Consumer Surveys The Directorate General for Economic and Financial Affairs, European Commission
Consumer Confidence Nationwide Building Society
Questions
- What factors do you think might influence sentiment or confidence amongst households?
- What factors might affect sentiment or confidence amongst businesses?
- In what ways do you think sentiment and economic activity might be connected?
- Some commentators are arguing that the general election might be impacting on consumer confidence. Why do you think this might be the case?
- If you were going to assess the economic sentiment of consumers or businesses, what sorts of questions do you think you might ask?