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?
Greece’s public deficit currently stands at 13.6% and the UK isn’t that far behind. Austerity measures are planned to reduce the Greek deficit to less than 3% of GDP by 2014. This will be achieved through a variety of spending cuts and tax rises. This is the price that Greece will have to pay to receive a £95 billion bailout. Wages are likely to be frozen, cuts will be evident throughout the economy in areas such as education and pensions and the general population may see a tax rise.
In response to these proposals, on which Parliament will vote by the end of the week, the Greek economy has suffered from widespread strikes. Flights were grounded, trains stopped, schools shut, hospitals closed their doors, offices closed for business and those close to retirement are considering resignation before the measures are passed.
As life almost comes to a stop in Greece, could the UK follow suit? It’s no secret that the UK deficit is enormous – £163 billion or about 12% of GDP. Nor is it a secret that spending cuts and tax rises are inevitable. Furthermore, over the past two years, there have been several high profile strikes. (See article The Winter of Discontent: the sequel? and Turbulence in the air). A spokesman from The Public and Commercial Services Union said:
“If the cuts are anything like what is being suggested, industrial action by the unions is not only likely, it’s inevitable”.
The bailout of Greece may avert one Greek tragedy, but another one could be just around the corner and that’s not just for Greece.
Greece brought to half over general strike over cuts BBC News (5/5/10)
Greek strikes test government austerity plans Reuters (4/5/10)
Bank of England Governor: poll winner will be out of power for a generation Independent, Andrew Grice and Colin Brown (30/4/10)
Flights grounded, shops shut in Greek strike Channel 4 News, Kris Jepson (5/5/10)
Greek strikers hit Athens streets over austerity plan BBC News (4/5/10)
Greek strikes test government austerity plans The Economic Times (4/5/10)
Questions
- What is the purpose behind the strikes? How effective are they likely to be?
- What are the costs of strikes to a) consumers b) businesses c) the wider economy?
- Why is collective bargaining more effective than individual bargaining?
- Why could the Greek picture be a possible forecast of the UK economy after the May election?
- Are strikes a price worth paying if the government is to reduce its debt?
The final debate between the three party leaders was mainly on the economy. A key issue under debate was how each party would cut the huge budget deficit and how households and businesses would be affected. Something that we may see in the future is a banking levy and possibly new powers given to the Bank of England to ‘ration credit in boom years’. Spending cuts and tax rises are inevitable, but there were differences between the parties as to the extent of these changes and when they are likely to occur. The articles below consider these important issues, as the election entered the final 72 hours.
The broadcast debate
Prime Ministerial Debate: The Economy BBC Election 2010
Articles and podcasts
Economic debate: Banks and a balanced economy BBC News, Peston’s Picks (29/4/10)
General Election 2010: a fact checker for the leaders’ debate on the economy Telegraph (29/4/10)
Tim Harford on the truth behind leaders’ claims BBC Today Programme (30/4/10)
Questions
- It is not unusual for countries to have a budget deficit, so why is the UK’s receiving so much attention in the election?
- What is the difference between retail and investment banking?
- What do you think David Cameron meant by giving the Bank of England power ‘to call time on debt in the economy’?
- What is the difference between the budget deficit and national debt?
- What are the arguments for and against cutting the budget deficit now, as the Conservatives want to do and cutting it in the next financial year, as Labour is suggesting?
Below you will find links to the manifestos of the three main UK-wide parties for the general election on May 6. It’s not our role to suggest to those of you living in the UK with the right to vote how you should vote. The one thing we would suggest is that you consider carefully what the parties are proposing.
What is clear is that the state of the economy and the policies necessary to tackle economic problems are central to all the manifestos. As a student of economics, you should be able to assess the manifestos in terms of how the parties set out the economic problems facing the UK and what they propose doing about them.
So look through the manifestos below and then answer the questions we’ve posed about the UK economy and about the economic policies being proposed. If you are uncertain about how to answer them, then ask yourself what extra information would I need to enable me to give a good answer.
The manifestos (in alphabetical order)
The Conservative Party manifesto
The Labour Party manifesto
The Liberal Democrat Party manifesto
Other sources
We are reluctant to recommend newspaper articles, as all newspapers at election time tend to be highly partisan and are therefore likely to give you a very specific ‘spin’ on the parties’ proposals. Perhaps the two best independent sources are the BBC and the Institute for Fiscal Studies. See:
Election analysis 2010 Institute for Fiscal Studies
Election 2010 BBC News
Stephanomics Stephanie Flanders’ blog (this links to the archive).
Questions
- How do the analyses of the economic problems facing the UK differ between the three manifestos?
- Compare the policies of the three parties for cutting the public-sector deficit. Consider the following issues: the size and nature of any cuts in government expenditure; the size and nature of any tax increases; the timing of the meaures.
- What assumptions are being made about the determinants of aggregate demand over the coming months and the role of fiscal policy in this?
- Compare the policies of the three parties towards the distribution of income. To what extent have the parties taken into account possible incentive/disincentive effects of policies of redistribution?
- To what extent are the parties proposing using the tax system to tackle problems of externalities? Give examples and assess how effective the policies are likely to be.
- To what extent do each of the manifestos leave you with unanswered questions about the economy and how their proposed policies will tackle economic problems?
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?