There’s some good news and some bad news about the UK economy. The good news is that there are signs that the recovery is gathering momentum; the ‘green shoots’ are growing bigger. The bad news is that it’s the ‘wrong type of growth’!
One of the main underlying problems of the 2008 financial crisis was that household debt had been increasing to unsustainable levels, egged on by banks only too willing to lend, whether as personal loans, on credit cards or through mortgages. When the recession hit, many people sought to reduce their debts by cutting back on spending. This further fuelled the recession.
What the government and most economists hoped was that there would be some rebalancing of the economy, with less reliance on consumer spending to drive economic growth. Instead it was hoped that growth would be driven by a rise in investment and exports. Indeed, the 25% depreciation of sterling exchange between 2007 and 2009 was seen as a major advantage as this would boost the demand for exports and encourage firms to invest in the export sector.
But things haven’t turned out the way people hoped. The recession (or lack of growth) has been much deeper and more prolonged than previous downturns in the economy. Today, real GDP per head is more than 7% below the level in 2007 and many people have seen much bigger declines in their living standards.
But also, despite the austerity policies, the economy has not been ‘rebalanced’ towards exports and investment. Exports are 3% lower than in 2006 (although they did grow between 2009 Q2 and 2011 Q1, but have since stagnated). And investment is 27% lower than in 2006. Household consumption, however, has grown by about 2% and general government consumption by around 9% since 2006. The chart shows the figures, based on 2006 Q1 = 100.
(Click here for a PowerPoint of the chart.)
And recent evidence is that consumption is beginning to grow faster – not because of rising household incomes, but because of falling saving rates. In 2008, the household saving ratio had fallen to nearly 0% (i.e. households were on average saving about the same as they were borrowing). Then the saving ratio rose dramatically as people reined in their spending. Between 2009 and 2012, the ratio hovered around 7%. But in the first quarter of 2013, it had fallen to 4.2%
So the good news is that aggregate demand is rising, boosting economic growth. But the bad news is that, at least for the time being, this growth is being driven by a rise in household borrowing and a fall in household saving. The videos and articles consider whether this is, however, still good news on balance.
Britain’s imbalanced economy The Economist, Zanny Minton Beddoes and Richard Davies (4/7/13)
Britain’s Export Drought: an enduring disappointment The Economist, Andrew Palmer and Richard Davies (9/2/13)
‘Green shoots’ of economic recovery in Rugby BBC News, Paul Mason (12/6/13)
Is the UK economy seeing the ‘wrong kind’ of green shoots? BBC News, Stephanie Flanders (3/7/13)
The export drought: Better out than in The Economist (9/2/13)
Exports and the economy: Made in Britain The Economist (21/1/12)
The economy: On a wing and a credit card The Economist (6/7/13)
Unbalanced and unsustainable – this is the wrong kind of growth The Telegraph, Jeremy Warner (8/7/13)
The UK economy’s looking up – but no one’s told manufacturers The Guardian, Heather Stewart (10/7/13)
Quarterly National Accounts, Q1 2013 (27/6/13)
Forecasts for the UK economy: a comparison of independent forecasts HM Treasury (June 2013)
ISM Manufacturing Report on Business® PMI History Institute for Supply Management
- What are forecasters expecting to happen to economic growth in the coming months? Why?
- What factors determine investment? Why has it fallen so substantially in the UK?
- Explain what is meant by the ‘accelerator’. Is the rise in consumption likely to lead to an accelerator effect and, if so, what will determine the size of this effect?
- Why have exports not grown more rapidly despite the depreciation of sterling after 2007?
- What will determine the rate of potential economic growth in the UK economy? How will a rise in real GDP driven by a rise in consumption impact on potential GDP and potential economic growth?
- What supply-side policies would you recommend, and why, in order to increase potential economic growth?
I found myself singing this morning which I have to admit is not the most pleasant experience for those in ear-shot. I was singing to the tune of ‘love is all around us’. But rather than the words of the song performed by the Troggs in the late 1960s and by Wet Wet Wet in the 1990s, I found myself singing ‘debt is all around us’. It could easily have been the sub-conscious effect of the headlines relating to government debt (also known as national debt). But, actually it was the effect of having looked at my latest credit card statement and noting the impact that my summer holiday had had on my financial position! Relaxation, so it seems, doesn’t come cheap. With this in mind, I have just taken a look at the latest bank of England figures on British household debt. You can do the same by going to the Bank of England’s statistical release lending to individuals.
The latest figures reveal that at the end of June 2011 households in Britain had a stock of debt of £1.451 trillion. Now this is a big number – not far short of the economy’s annual Gross Domestic Product. But, interestingly, this is its lowest level in three years. Indeed, over the past twelve months the stock of household debt has fallen by £6 billion. This is the result of the sector’s repayment of unsecured debt, such as credit card debt and overdrafts. The stock of unsecured debt has fallen by £8.2 billion or 3.8% over the past year to stand at £209.7 billion.
The remaining £1.241 trillion of household debt is secured debt which is debt secured against property. The stock of secured debt has risen by £2.16 billion over the last 12 months, but this equates to a rise of less than 0.2%. In fact, further evidence from the Bank of England reveals that households are not only looking to reduce their exposure to unsecured debt but to pay off mortgage debt too. You might wonder how this might be occurring given that the stock of mortgage debt has risen, albeit only slightly. 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 money on improving our existing housing stock we acquire more mortgage debt. Bank of England figures show that housing investment has been greater than new secured lending. Consequently, the additions to the stock of lending have been less than housing investment. This gives rise to negative housing equity withdrawal, i.e. negative HEW.
The Bank of England estimates that in Q1 of 2011 there was an increase in housing equity of £5.8 billion. Negative housing equity withdrawal (HEW), an injection of housing equity, has occurred every quarter since Q2 2008. Since then, the UK household sector has injected some £63.7 billion of housing equity. The opportunity cost of this injection is that by increasing equity in property households are using money that could have been used for consumption or for purchasing financial assets. The extent of this negative HEW over the past 12 quarters has been the equivalent to 2.2% of disposable income.
While my credit card may have ballooned this month, it would appear that the household sector is looking to reduce its debt exposure. I will be looking to do likewise!
Housing injection goes on BBC News (4/7/11)
Personal insolvencies rise Independent, Philip Whiterow (5/8/11)
Mortgage boom as homeowners cash in an try reduce debts Independent, Simeon Read (5/7/11)
Homeowners inject £5.8 billion of equity into property in first quarter Telegraph, Emma Rowley (5/7/11)
Housing equity injection continues Guardian, Hilary Osborne (4/7/11)
Lending to individuals statistical release Bank of England
Housing equity withdrawal (HEW) statistical release Bank of England
- Illustrate with examples what is meant by secured and unsecured debt.
- What factors might help to explain the longer-term growth in secured and unsecured debt over recent decades?
- What factors might help to explain the more recent patterns in secured and unsecured debt?
- What do you understand by the term housing equity withdrawal?
- What is meant by negative HEW?
- What factors might help to explain the negative HEW observed for the past twelve quarters?
- What implications might there be for economic growth of negative housing equity withdrawal (HEW)?
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!
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
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
- 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?
Figures released by the Bank of England show that in the third quarter of 2009 UK households increased their housing equity (i.e. repaid mortgage debt) by £4.9 billion, equivalent to 2% of their disposable income. This was the sixth consecutive quarter in which saving in housing exceeded net mortgage lending. Interestingly, during each of these six quarters the UK economy contracted.
Saving in housing (or ‘negative housing equity withdrawal’ (HEW)) will reduce aggregate demand if it is funded out of income that would otherwise have been spent on consumer goods and services. Since the proportion of income saved, as measured by the saving ratio, climbed from an historic low of 0.9% in the third quarter of 2008 to 8.6% in the same quarter of 2009, increased saving in housing equity has been depressing spending levels. Indeed, across the six quarters in which HEW has been negative, households have increased their stock of housing equity by £33.9 billion, equivalent to 2.3% of disposable income – money which could otherwise have been spent.
Increased saving in housing by households is an example of the household sector’s attempt to repair its balance sheets. Another example has been the fall in the sector’s outstanding stock of unsecured debt (e.g. outstanding personal loans and credit-card debt). Elsewhere in the economy, banks too have been looking to repair their badly damaged balance sheets and, of course, there is the considerable interest in how the UK government will reduce its budget deficit. We can expect these repairs to balance sheets to have some impact on the pace of economic recovery. What is less certain is the size and duration of these balance sheet effects.
Home loan repayments ‘a priority’ BBC News (29/12/09)
Homeowners pay off £5bn of mortgage debt Financial Times, Vanessa Houlder (30/12/09)
Homeowners stop cashing in on the value of their homes Telegraph, Myra Butterworth (29/12/09)
Mortgages paid off at the fastest rate for 40 years Guardian, Larry Elliott (30/12/09)
Homeowners rush to repay mortgages thisismoney, Rosamund Urwin (29/12/09)
- What factors might explain why UK households have been increasing their saving in housing equity during 2009?
- Why might increasing amounts of HEW, such as those in the mid 2000s, not necessarily result in higher levels of consumer spending?
- What do you understand by the ‘household balance sheets’? What do you think is likely to be the most significant item on the sector’s balance sheets?