I have something of an admission to make: I love data. I suppose it goes back to my time working as a civil servant. My job was to brief on the latest data releases relevant to the household sector and to try to interpret what the latest numbers might be telling us. It meant that on one day I might be briefing about the latest household spending numbers and the next on house prices. It was not only great fun but it also helped my understanding of economics and, importantly, my understanding of the issues and topics that economists wrestle with. Data help to give context perhaps by placing current outcomes, such as the latest high street sales figures, in an historical context or by enabling international comparisons, such as comparing UK consumer behaviour to that across the Channel in France. These days I spend my time teaching, but I retain my passion for data and I do all that I can to convey this to those I teach. So, what I thought we would do here is to look at a few numbers relating to UK households, show that we need not be frightened by them, and show how they can help to paint a picture of the current economic behaviour of the UK consumer.
My first teaching week back this academic term began by talking to students about consumer spending. I think it’s important that those new to economics and learning about household spending behaviour have a sense of how much UK households spend, how this varies, and why how much the sector spends is important. Let’s begin with the household spending figure for 2009 – the 2010 figure will not be available for a couple of months. By going to the latest release of the Quarterly National Accounts we discover that UK households spent £874 billion in 2009. Though a big enough figure in its own right, it is actually 2% less than the £892 billion in 2008. But, more than this, remember that these are nominal values reflecting the prices of 2008 and 2009. The average price of household consumption goods and services rose by 1.3% between these two years which, if we eliminate, means that the volume of consumer spending fell by 3.3%.
To convince anyone that patterns in household spending do matter is pretty straightforward. One way of doing this is to consider household spending relative to GDP, i.e. the value of our country’s output. If we return to latest Quarterly National Accounts we discover that GDP in 2009 is estimated at £1.39 trillion. So with household spending of £874 billion and total output of £1.39 trillion we can readily see the value of households as purchasers of this output. To be more specific, household spending in 2009 was equivalent to some 63% of GDP. This is one of the reasons why economists pay so much attention to trying to interpret the spending patterns of households – one of my old jobs – and, of course, trying to predict the future path of household spending.
You might be wondering about more recent patterns in household consumption since, after all, 2009 now seems quite a while ago. Well, in the third quarter of 2010 household spending was estimated at £232.3 billion and if we add to this the revised figures for the previous three quarters we get a 4-quarter total of £910.4 billion. For many analysts though the key numbers relate to the growth in the volume of household spending. In Q3 2009 real household spending grew by 0.3%. Whilst the first quarter of 2010 saw spending volumes decline by 0.1%, Q3 was the second consecutive quarter in which spending volumes increased. The concern, however, was that the 0.3% growth in Q3 was down on the 0.8% growth in Q2. We wait with much interest the Q4 figure.
When I talk to students about the determinants of household spending many, quite naturally, will point to the importance of disposable income. Again let’s return to the Quarterly National Accounts. In 2009 the disposable income, i.e. post-tax income, of the household sector was estimated at £942.2 billion. That’s another big number. Let’s put that alongside our spending number for households of £874.4 billion and we have an average propensity to consume (APC) out of disposable income of 0.92 which compares with 0.97 in 2008 and 0.98 in 2007. This suggests that households were inclined to do other things with their income in 2009 than just merely spend it. We observe this too if we take note of the real changes in consumption and income in 2009. After removing the impact of price changes, we find that while consumption volumes fell by 3.3%, the spending power of the sector’s disposable income actually rose by 1.1%.
But, what of more recent patterns in disposable income? Well, disposable income in Q3 2010 is estimated to have been £244.3 billion which with consumption of £232.3 billion equates to an average propensity to come out of disposable income of 0.95. If we again add the Q3 disposable income number to those from the previous three quarters we have a 4-quarter disposable income figure of £964.4 billion which gives us an average propensity to consume over this period of 0.94 and, hence, a tad higher than 2009, albeit not at the levels of 2007 and 2008. Meanwhile, real disposable income rose by 1.1% in Q3 following a 2% decline in Q2. The quarterly disposable income series is a notoriously volatile series and the recent past has seen no change in that. Perhaps the key fact though is that the real value of the household sector’s disposable income in Q3 2010 was 1.5% lower than it was a year earlier. Hence, while real disposable income grew across 2009, it is likely to have fallen across 2010.
So why did household spending fall so markedly in 2009 despite the rise in disposable income. It is likely that the impact of the financial crisis, the subsequent recession and a sense of uncertainty amongst households will have been contributory factors. One way in which these factors seems to have affected UK households is in their desire to reduce their exposure to debt. So we end with a few numbers, some a little eye-watering, which relate to household debt and demonstrate the attempt by households to improve their financial positions.
Figures from the Bank of England contained within Table 3 of their statistical release lending to individuals show that at the end of November 2010 households had a stock of debt of £1.454 trillion, not too dissimilar a number to that for GDP! But, this is £5.6 billion less than at the end of November 2009. The main reason for this is the sector’s repayment of unsecured debt, such as credit card debt and overdrafts. Unsecured debt fell by £13.4 billion over the year to stand at £214.1 billion.
The remaining £1.24 trillion of household debt is secured debt and so debt secured against property. This has risen by £7.7 billion over the 12 months to November. But, it would be a mistake to believe that because the overall stock of mortgage debt hasn’t fallen that households are not trying to paying it off. How can this be, you might ask? The answer lies in the growth of housing investment relative to that of mortgage debt. Housing investment relates, in the main, to the purchase of brand new homes and to major home improvements. As our population grows and the housing stock expands and as we spend more on improving our existing housing stock we acquire more mortgage debt. However, the Bank of England figures shows that housing investment has been greater than new secured lending. In other words, the additions to the stock of lending have been less than housing investment.
In Q3 the Bank of England estimates an increase of housing equity of £6.1 billion. Negative housing equity withdrawal (HEW), an injection of housing equity, has become something of a new norm dating back to when the UK economy went into recession in Q2 2008. Since then, the UK household sector has injected some £49.7 billion of housing equity. This, of course, comes at a potential cost for the economy because by increasing equity in property households are using money that cannot be used to fund current consumption or to purchase financial assets. The extent of this negative HEW over the past 10 quarters has been the equivalent to 2.1% of disposable income.
So that ends my tour of the household sector through numbers. Hopefully, the numbers have helped to paint a picture of the importance of the household sector for the economy and to make you think about some of the variables that affect the sector’s behaviour. Given these interesting economic times, painting by economic numbers has never been so much fun!
Articles
Mortgage debt falls for the 10th quarter in a row BBC News (29/12/10)
Homeowners make record mortgage repayments Independent, Hugo Young (30/12/10)
Homeowners reduce their mortgages by £6bn in just three months Telegraph, Louise Armistead (30/12/10)
Homeowners paying off mortgages at faster rate Guardian, Jill Insley (29/12/10)
Homeowners paying back mortgages at rapid rate Daily Mail (29/12/10)
Christmas trading hit by snow, says BRC Financial Times, Chris Giles (11/1/11)
Festive freeze hits sales across the high street Independent, James Thompson (11/1/11)
Shoppers hit hard by inflation Independent (12/11/10)
Families warned by Bank of England of even more painful year ahead Daily Mail, Lucy Farndon (28/12/10)
Shop inflation accelerated in December on commodities, retailers say Bloomberg, Svenja O’Donnell
Data
Lending to individuals statistical release Bank of England
Housing equity withdrawal (HEW) statistical release Bank of England
Latest on GDP growth Office for National Statistics (22/12/10)
Quarterly National Accounts, 3rd Quarter 2010 Office for National Statistics (22/12/10)
UK Economic Accounts, Time Series Data Office for National Statistics
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 factors do you think affect consumer spending in the short-term, say over a three-month period? Would the same factors be important if we were looking at spending patterns over a longer period of time?
- Consumers are sometimes described as consumption-smoothers which means that they look to smooth their profile of spending in the face of volatile incomes. What factors do you think affect their ability to do this?
- Would you expect the relationship between consumption and income to be consistent and predictable? Explain your answer.
- Why do you think real spending values fell in 2009 despite real disposable income rising? Does this mean that households are not in fact consumption-smoothers?
- The financial system enables households to accumulate financial assets, financial liabilities and to acquire housing wealth. How might these three variables impact on household spending?
- Illustrate with examples what is meant by secured and unsecured debt. Does the long-term accumulation of stocks of these debts have any consequences for household spending?
- What do you understand by the term housing equity withdrawal? What is meant by negative HEW and which the UK has observed for the past ten quarters?
- What factors might help to explain the ten consecutive quarters of negative HEW? Would you expect things to change in the near future? Explain your answer.
- What is the opportunity cost of positive housing equity withdrawal (HEW)? What about the opportunity cost of negative HEW?
- To what extent do you think household spending affects economic growth? Is household spending a long-term driver of economic growth?
Bank rate in the UK has been at the historically low level of 0.5% since March 2009 and the MPC decision on 13 January was to leave the rate unchanged (see also). But inflation has been well above the Bank of England’s target of 2% since December 2009 and it could well rise further as international commodity prices are soaring. Some economists are thus arguing that Bank rate should rise. This is crucial, they say, to dampen inflationary expectations.
Other economists, however, argue that aggregate demand is likely to remain depressed and that the economy is operating with a large negative output gap. What is more, house prices are falling, as are real wages (see Bosses gain – workers’ pain)
In the following extract from BBC Radio 4’s Today Programme, two economists, Charles Goodhart and Willem Buiter, both former members of the MPC, debate the issue.
Podcast
Should interest rates rise? BBC Today Programme (13/1/11)
Data
Economic and Labour Market Review, Office for National Statistics (For inflation data see Tables Chapter 3, Table 3.01; for interest rates see Tables Chapter 5, Table 5.08)
Monetary Policy Committee Decisions Bank of England
Questions
- What are the arguments for a rise in Bank rate at the current time?
- What are the arguments against a rise in Bank rate at the current time?
- What information would you require to decide which of the arguments was the more powerful?
- Why is it difficult to decide the size of the output gap?
- To what extent do the arguments for and against a rise in Bank rate depend on the factors determining expectations, and what expectations are important here?
- To what extent are exchange rates relevant to the effectiveness of interest rate policy?
One of the key economic issues in 2010 has been the state of countries’ public finances. We take one final look this year at the latest state of the UK public finances in light of the latest release of Public Sector Finances from the Office for National Statistics. In doing so we will be updating our blog of 20th November – What’s £81.6 billion and still rising?.
Well, a good place to start is to up-date you on the amount of net borrowing. This is the amount by which public sector expenditure exceeds current receipts, almost entirely taxation revenues. After adjusting for the impact of temporary ‘financial interventions’ or policies to provide stability for the financial system, the amount of net borrowing in November was a record high £23.3 billion. Therefore, the amount of net borrowing since April and so the start of the financial year rose from over £81 billion in October – and the reason for the title of the earlier blog – to £104.4 billion in November. This is roughly the same as in the first eight months of financial year 2009/10 when we had amassed net borrowing of £105.1 billion.
In the first eight months of the last two financial years monthly net borrowing has averaged close on £13 billion. The government’s independent economic forecaster the Office for Budget Responsibility (OBR) released its Economic and Fiscal Outlook at the end of November. The OBR is forecasting that over the entire financial year the amount of net borrowing will be £148.5 billion or the equivalent of 10% of GDP.
The public-sector current budget balance measures whether the public sector is able to afford its current expenditures. This balance was an important indicator under the previous Labour government of whether it was meeting its Golden Rule whereby over the economic cycle it should be able to its afford current expenditures and any borrowing would be for net investment, i.e. capital expenditures giving rise to a stream of benefits over time. Therefore, the current budget balance compares revenues with current expenditures, including the wages of public sector staff, welfare payments and expenditures on inputs consumed in the current financial year. The public sector’s current budget (excluding financial interventions) was in deficit in November by £20.0 billion.
In the financial year to date, the current budget deficit has reached £83.2 billion almost identical to the total in the previous financial year. This means that the average monthly current budget deficit over the first eight months of the last two financial years has been £10.4 billion. The OBR is forecasting that there will be a deficit on the current budget in 2010-11 of £106.2 billion, the equivalent of 7.2% of GDP
Finally, we update the public-sector net debt total. The public sector’s net debt is its stock of debt less its liquid financial assets (largely foreign exchange reserves and bank deposits). As of the end of November, the stock of net debt (excluding the impact of the financial interventions) stood at £863 billion, equivalent to 58% of GDP. The stock of debt at the end of the last financial year stood at £772 billion, equivalent to 54% of GDP. The OBR expects it to increase to £922.9 or 60.8% by the end of this financial year.
The extent of the increase in the stock of public sector net debt is very clearly illustrated illustrated if we compare the latest numbers with those at the end of 2006/7 and so before the financial crisis really took hold. Back then, the stock of debt stood at £498 billion or 36% of GDP and so the last government was meeting it sustainable investment rule by keeping net debt below 40% of GDP. Both the sustainable investment rule and the golden rule were to be abandoned during 2008 as the financial crisis took grip.
If we add back the impact of the financial interventions, most notably the balance sheet effects of public sector banks, including Northern Rock, then the stock of public sector net debt at the end of November was £971 billion or 65.1% of GDP. This means that the actual stock has almost doubled since March 2007. It is perhaps little surprise that the government is introducing the Bank Levy in 2011 which, in large part, is being designed to acknowledge the external costs that the banking system can cause to the wider economy and, of course, to the public finances.
Articles
Public borrowing soars to £23.3bn record high Independent, Nick Clark (22/12/10)
UK borrowing hits new record high as government spending jumps Telegraph, Emma Rowley (21/12/10)
Government borrowing hits record high Herald, Douglas Hamilton (22/12/10) )
Public borrowing: What the economists are saying Guardian (22/12/10)
Shock as govt borrowing hits record high Sky News, James Sillars (21/11/10)
Record UK borrowing raises concerns Financial Times, Daniel Pimlott (21/12/10)
UK government borrowing hits record high BBC News (21/12/10)
City shocked as government borrowing hits record high Scotsman, Natalie Thomas (22/12/10)
Data on UK Public Finances
Latest on Public Sector Finances Office for National Statistics (21/12/10)
Public Sector Finances Statistical Bulletin, November 2010 Office for National Statistics (21/12/10)
Public Sector Finances (First Release) Time Series Data Office for National Statistics
Statistics on Public Finance and Spending HM Treasury
Questions
- Give examples of variables which are stock concepts and those which are flow concepts. Is public sector net borrowing a stock or flow concept? What about public sector net debt?
- Give examples of public expenditures which are examples of current expenditures and examples of those which are capital expenditures?
- What arguments could you put forward for and against the previous Labour government’s golden rule? What about its sustainable investment rule?
- Explain the difference between the current budget balance and net borrowing. Why might governments want to measure both these budget balances?
- What arguments would you make for and against a rapid reduction of the level of net borrowing by the UK public sector?
Every six months the Bank of England publishes its Financial Stability Report. “It aims to identify the major downside risks to the UK financial system and thereby help financial firms, authorities and the wider public in managing and preparing for these risks.”
In the latest report, published on 17 December 2010, the Bank expresses concern about the UK’s exposure to problems overseas. The two most important problems are the continuing weaknesses of a number of banks and the difficulties of certain EU countries in repaying government bonds as they fall due and borrowing more capital at acceptable interest rates. As the report says:
Sovereign and banking system concerns have re-emerged in parts of Europe. The IMF and European authorities proposed a substantial package of support for Ireland. But market concerns spilled over to several other European countries. At the time of writing, contagion to the largest European banking systems has been limited. In this environment, it is important that resilience among UK banks has improved over the past year, including progress on refinancing debt and on raising capital buffers. But the United Kingdom is only partially insulated given the interconnectedness of European financial systems and the importance of their stability to global capital markets.
The Bank identifies a number of specific risks to the UK and global financial systems and examines various policy options for tackling them. The following articles consider the report.
Articles
Bank warns of eurozone risks to UK as EU leaders meet Independent, Sean O’Grady (17/12/10)
Deep potholes on the road to recovery Guardian, Nils Pratley (17/12/10)
It’s reassuring that regulators are still worried about financial stability The Telegraph, Tracy Corrigan (17/12/10)
Europe is still searching for stability and the UK must find it too Independent, Hamish McRae (17/12/10)
Shafts of light between the storm clouds The Economist blogs: ‘Blighty’ (17/12/10)
Report
Financial Stability Report, December 2010: Overview Bank of England
Financial Stability Report, December 2010: Links to rest of report Bank of England
Questions
- What are the most important financial risks facing (a) the UK; (b) eurozone countries?
- What is the significance of the rise in banks’ tier-1 capital ratios since 2007?
- Which is likely to be more serious over the coming months: banking weaknesses or sovereign debt? Explain.
- What is being done to reduce the risks of sovereign default?
- Why might the weaker EU countries struggle to achieve economic growth over the next two or three years?
- How do interest rates on government debt, as expressed by bond yields, compare with historical levels? What conclusions can you draw from this?
- What is likely to happen to bond yields in the USA, the UK and Germany over the coming months?
- What has been the effect of the extra £200 billion that the Bank of England injected into the banking system through its policy of quantitative easing?
This week has seen the publications of two sets of forecasts on the UK housing market in 2011. The first of these came from Rightmove. It is forecasting that house prices next year could fall by as much as 5%. The extent of the fall though is argued to dependent, in part, on any rise in the Bank of England’s base rate and the number of properties taken into possession by lenders. These two factors are, of course, linked because higher debt-servicing costs can contribute to repossessions as the affordability of mortgages decrease. An increase in what are termed ‘forced sales’ will add to Rightmove’s general expectation of over-supply of property.
Righmove are expecting considerable local variations in house prices as a result of local demand and supply conditions. This makes forecasting a national average house price change extraordinarily difficult. It argues that the extent to which potential buyers are credit-constrained or to which demand is ‘credit crunch resistant’ varies across the country. This coupled with variations in the amount of supply to local markets will contribute to considerable differences in house price movements with house prices being ‘underpinned’ in some markets.
Rightmove is expecting the number of properties coming on to the housing market in 2011 to be around 1.2 million, 10% lower than in 2010. However, it is expecting only around 600,000 transactions which is close to half the historic average.
The second set of housing market forecasts this week was published by the Council of Mortgage Lenders (CML). The CML is forecasting that low interest rates will help to underpin current house price values with ‘flat or modestly falling house prices’. They argue that that while recent house price weakness will persist they ‘do not foresee any sharp fall in prices’. The CML are not expecting large numbers of buyers to hold off from looking to buy, but acknowledge there is uncertainty about the availability and cost of mortgage funding.
One contributing factor to the uncertainty surrounding the quantity and price of mortgages is the end to the Bank of England’s Special Liquidity Scheme (SLS). The SLS allowed banks to swap for a period of up to 3 years financial assets, such as mortgage-backed securities (a security representing a claim on the cash flows from mortgage loans), for UK Treasury Bills (short-term government debt). The scheme was designed to provide the banking system with liquidity. The last swaps will expire in January 2012. The CML reports that currently about £130 billion needs to be repaid by banks. More generally, of course, financial institutions are likely in 2011 to continue repairing and rebalancing their balance sheets and this is likely to impact on their lending decisions.
We noted how the Rightmove house price forecast for 2011 was partly dependent on those forced sales arising from repossessions. The CML is expecting what it terms a ‘modest increase’ in the number of possessions from around 36,000 this year to 40,000 next year. The CML though expects the number of transactions in 2011 to be a little higher than Rightmove, albeit still historically low at around 860,000.
All in all, activity levels in the housing and mortgage markets in 2011 are expected to be relatively subdued. This coupled with the expectation that house prices will be lower in 2011 suggests a very sober outlook indeed for the UK housing market. Happy New Year!
Articles
Lenders forecast flat house prices Financial Times, Norma Cohen (14/12/10)
UK mortgage lending to fall to 30-year low Telegraph, Steven Swinford (15/12/10)
Repossessions to rise in 2011, lenders forecast BBC News (15/12/10)
Market freeze: Homes sold once in 20 years Sky News, Hazel Baker (15/12/10)
U.K. mortgage lending may decline by a third in 2011 as weakness persists Bloomberg, Scott Hamilton (15/12/10)
House prices fall faster as estate agent predicts worse to come Telegraph, Ian Cowie (13/12/10)
Home sellers warned to drop asking price by 5% if they want to find a buyer Daily Mail, Becky Barrow (13/12/10)
U.K. home sellers may cut prices by as much as 5% in 2011 after December drop Bloomberg, Scott Hamilton (13/12/10)
Housing market forecasts
Rightmove’s housing market forecasts can be found within the December 2010 edition of its House Price Index
Rightmove December 2010 House Price Index (13/12/10)
CML publishes 2011 market forecasts CML News and Views, Issue 24 (15/12/10)
Questions
- Compare and contrast the Rightmove and CML house price forecasts for 2011. How similar are the stories underpinning their forecasts?
- What do you understand by forced sales? Using a demand-supply diagram explore how an increase in properties taken into possession could impact on house prices in 2011.
- What do you think affordability means in the context of housing? How might we measure this?
- What factors do you think might impact on the price and availability of mortgage finance in 2011?
- What do you understand to be the purpose of the Bank of England’s Special Liquidity Scheme. Using a demand-supply diagram explore how the termination of the scheme early in 2012 could impact on house prices in 2011.
- What do you think Rightmove means by ‘credit crunch resistant’ housing demand?
- Can demand-supply analysis help to explain how house prices pressure could vary from one area to another? Explain your answer using appropriate diagrams.