Have you ever woken in the night worrying about your finances? Most of us have. Our overall financial position undoubtedly exerts influence on our spending. Therefore, we would not expect our current spending levels to be entirely determined by our current income level.
Our financial health, or what economists call our net financial wealth, can be calculated as the difference between our financial assets (savings) and our financial liabilities (debt). Between them, British households have amassed a stock of debt of £1.423 trillion, almost as much as annual GDP, which is around £1.5 trillion (click here to download the PowerPoint.) We look here at recent trends in loans by financial institutions to British households. We consider the effect that the financial crisis and the appetite of individuals for lending is having on the debt numbers.
There are two types of lending to individuals. The first is secured debt and refers to loans against property. In other words, secured debt is just another name for mortgage debt. The second type of lending is referred to as unsecured debt. This covers all other forms of loans involving financial institutions, including overdrafts, outstanding credit card debt and personal loans. The latest figures from the Bank of England’s Money and Credit show that as of 31 March 2013, the stock of debt owed by individuals in the UK (excluding loans involving the Student Loans Company) was £1.423 trillion. Of this, £1.265 trillion was secured debt while the remaining £157.593 billion was unsecured debt. From this, we can the significance of secured debt. It comprises 89 per cent of the stock of outstanding debt to individuals. The remaining 11 per cent is unsecured debt.
The second chart shows the growth in the stock of debt owed by individuals (click here to download the PowerPoint chart). In January 1994 the stock of secured debt stood at £358.75 billion and the stock of unsecured debt at £53.774 billion. 87 per cent of debt then was secured debt and, hence, little different to today. The total stock of debt has grown by 246 per cent between January 1994 and March 2013. Unsecured debt has grown by 197 per cent while secured debt has grown by 253 per cent.
However, more recently we see a different picture evolving, more especially in unsecured debt. Since October 2008, the monthly series of the stock of unsecured debt has fallen on 47 occasions and risen on only 7 occasions. In contrast, the stock of secured debt has fallen on only 12 occasions and often by very small amounts. Consequently, the stock of unsecured debt has fallen by 23.2 per cent between October 2008 and March 2013. In contrast, the stock of secured debt has risen by 3.5 per cent. The total stock of debt has fallen by 0.4 per cent over this period.
Another way of looking at changes in the stock of debt is to focus on what are known as net lending figures. This is simply the difference between the gross amount lent in a period and the amount repaid. The net lending figures will, of course, mirror changes in the total debt stock closely. For example, a negative net lending figure means that repayments are greater than gross lending. This will translate into a fall in the stock of debt. However, some difference occurs when debts have to be written off and not repaid.
The third chart shows net lending figures since January 1994 (click here to download the PowerPoint chart). The chart captures the financial crisis very nicely. We can readily see a collapse of net lending by financial institutions to households. It is, of course, difficult to disentangle from the net lending figures those changes driven by changes in the supply of credit by financial institutions and those from changes in the demand for credit by individuals. But, we can be certain that the enormous change in credit levels in 2008 were driven by a massive reduction in the provision of credit.
To further put the net lending figures into context, consider the following numbers. Over the period from January 2000 to December 2007, the average amount of monthly net lending was £8.52 billion. In contrast, since January 2009 the average amount of net lending has been £691 million per month. Consider too the composition of this net lending. The average amount of net secured lending between January 2000 and December 2007 was £7.13 billion per month compared with £1.39 billion for net unsecured lending. Since January 2009, monthly net secured lending has averaged only £756 million while monthly net unsecured lending has averaged -£64.4 million. Therefore, repayments of unsecured lending have outstripped gross unsecured lending.
While further analysis is needed to fully understand the drivers of the net lending figures, it is, nonetheless, clear that the financial system of 2013 is very different to that prior to the financial crisis. This change is affecting the growth of the debt stock of households. This is most obviously the case with unsecured debt. The stock of unsecured debt in March 2013 is 24 per cent smaller than in its peak in September 2008. It is now the job of economists to understand the implications of how the new emerging patterns in household debt will affect our behaviour and overall economic activity.
Money and Credit – March 2013 Bank of England
Statistical Interactive Database Bank of England
Bank of England extends lending scheme Financial Times, Chris Giles (24/4/13)
Markets insight: Europe and the US lines cross on household debt ratio Financial Times, Gillian Tett (9/5/13)
British families are the deepest in debt Telegraph, James Kirkup (14/5/13)
Total property debt of British households stands as £848bn Guardian, Hilary Osborne (13/5/13)
Household finances reach best level in three years – but are stuck below pre-crisis levels This is Money.co.uk, Matt West (17/5/13)
ONS says Welsh households have lowest debts in Britain BBC News (28/1/13)
- Outline the ways in which the financial system could impact on the spending behaviour of households.
- Why might the current level of income not always be the main determinant of a household’s spending?
- How might uncertainty affect spending and saving by households?
- Explain what you understand by net lending to individuals. How does net lending to individuals affect stocks of debt?
- Outline the main patterns seen in the stock of household debt over the past decade and discuss what you consider to be the principal reasons for these patterns.
- If you were updating this blog in a year’s time, how different would you expect the charts to look?
Events on the high street continue to grab the headlines. These are incredibly difficult times for retailers as households’ spending power continues to be squeezed and, in conjunction with technological change, households’ spending habits continue to evolve. In this blog we examine what the latest data from Consumer Trends tells us about the composition of household spending.
There are 12 broad categories of household spending. Each tells us something about the amount of expenditure in the UK by both UK and foreign households. In 2012 Q3, the value of household consumption taking place within the UK was £242 billion. During the whole of 2011, spending amounted to £929 billion. In real terms (after adjusting for price changes) spending in the UK fell by 1 per cent in 2011. Evidence of a rebound is limited. In the year to 2012 Q3, the volume of spending was just 0.8 per cent higher. In contrast, from 1998 to 2007 the average real rate of growth was 3.5 per cent.
As Chart 1 shows, the largest component of household spending in the UK is on spending associated with running a home. This component includes rents, expenditures incurred in undertaking routine maintenance and the payments for electricity, gas and water. Since 1997 this component has typically accounted for (after adjusting for price changes) 24 per cent of household consumption in the UK (22 per cent in 2012 Q3). The second largest consumption category is transport. This includes expenditure on purchasing vehicles, fuels, maintenance of vehicles and the costs of rail and air transport. It has typically accounted for about 15 per cent of expenditure (14 per cent in 2012 Q3).
Chart 2 shows the real annual rate of growth in expenditure of our 12 consumption categories from 1998 Q1 to 2007 Q4 and so before the financial crisis really took hold. It enables us to measure how the volume of purchases changes over a 12-month period. From it, we can see that all categories, except education, contributed to the positive real growth of household spending in the UK. The fastest growing component was clothing and footwear recording real growth of almost 11 per cent per year. The second most rapidly growing component was recreation and culture, which includes items ranging from package holidays, garden plants and musical instruments to sports equipment, cameras and books. This component grew, after adjusting for inflation, by nearly 9 per cent per year.
Chart 3 focuses on the real annual rate of growth since 2008 Q1. It paints a very different picture. Now only four categories have on average recorded positive annual rates of growth. Again, the volume of purchases of clothing and footwear has grown most rapidly by 6.3 per cent per year. While purchases on items associated with recreation and culture continue to grow, the annual rate of growth since 2008 is only 1.5 per cent compared with 9 per cent prior in the previous 10 years or so.
(Click here for a PowerPoint of all three charts.)
One category of spending that has been especially badly affected by events since 2008 has been household goods and services. This includes items such as furniture, major and small household appliances (including electrical appliances), carpets and tools. While the volume of purchases grew by 5 per cent per year from 1998 to 2007, since 2008 they have typically contracted at a rate of 3 per cent per year. This category helps to illustrate the difficult trading environment currently faced by many businesses in the UK.
Consumer Trends, Q3 2012 Statistical Bulletin National Statistics
Consumer Trends Time Series Dataset, Q3 2012 National Statistics
Surprise UK retail sales drop fuels trip-dip recession fears The Guardian, Larry Elliott (15/2/13)
UK retail sales fall unexpectedly in January BBC News, (15/2/13)
Retail sales: What the economists say The Guardian, Phillip Inman (15/2/13)
Another dark day for the high street as John Lewis cuts jobs The Guardian, Sarah Butler (13/2/13)
Republic chains enters administration BBC News, (15/2/13)
High Street retailers: Who has been hit the hardest? BBC News, (13/2/13)
- Using Charts 2 and Chart 3 construct a short briefing paper comparing the fortunes of difficult components of consumption before and after 2008.
- What economic factors could explain the contrasting impact of the economic slowdown since 2008 on the components of consumption?
- Can economic factors alone explain the success of failure of businesses? Explain your answer drawing on real-world examples.
- What factors do you think are likely to be important for the growth in consumer spending in the months ahead?
Consumer spending is crucial to an economy. In the UK total consumer spending is equivalent to almost two-thirds of the value of country’s GDP. Understanding its determinants is therefore crucial in attempting to forecast the short-term path of the economy. In other words, the growth of the economy in 2013 will depend on our inclination to spend.
While the amount of disposable income (post-tax income) will be one factor influencing our spending, other factors matter too. Amongst these ‘other factors’ is the stock of wealth of households. Here we look at the latest available figures on the net worth of the UK household sector. Will our stock of wealth help to underpin spending or will it act to constrain spending?
The household sector’s net worth is the sum of its net financial wealth and non-financial (physical) wealth. Net financial wealth is the balance of financial assets over financial liabilities. Financial assets include funds in savings accounts, shares and pension funds. Financial liabilities include debts secured against property, largely residential mortgages, and unsecured debts, such as overdrafts and unpaid balances on credit cards. Non-financial wealth largely includes the value of the sector’s holdings of property and buildings.
The following table summarises the net worth of the UK household sector at the end of 2011 and 2010. The figures are taken from the Office for National Statistics release, National Balance Sheet. They show that at the end of 2011, the household sector had a net worth of £7.04 trillion. This was up just 0.1 per cent up 2010. At the end of 2011, the stock of net worth of the household sector was 7 times the amount of disposable income earned by the sector in 2011.
The Household Sector Balance Sheet
|Net financial wealth
|Non-financial (physical) wealth