When confidence is this weak who is going to be borrowing?
This week there have been plenty of indications that business, and especially consumer, confidence are at very low levels. This provokes the question: just how likely is it that households are going to borrow on the scale the Office for Budget Responsibility expects?
Last week I pointed to OBR’s forecast for household borrowing and debt, which show this rising from 160% of income last year to 173% by 2015. Yesterday Paul Krugman blogged on this (referencing False Economy):
“…the only way the economy can avoid taking a hit from government cuts is if private spending rises to fill the gap — and although you rarely hear the austerians admitting this, the only way that can happen is if people take on more debt. So we have the spectacle of a government that inveighs against the evils of debt pinning all its hopes on an assumption that over-indebted households will dig their hole even deeper.”
I want to expand on this a bit, because this week there has been lots of evidence that this is unlikely to happen any time soon:
- Reports from Incomes Data Services, the Labour Research Department and the Engineering Employers Federation show that pay deals are lagging the Retail Price Index by more than 2 per cent.
- This is a well-established trend, so it isn’t surprising that the GDP figures showed that real household disposable income fell by 0.5 per cent in the last quarter of 2010, “the first annual fall in real household disposable income levels since 1981.”
- The Office for National Statistics reports that the VAT hike raised CPI inflation by 1.47 per cent, RPI by 1.24 per cent.
- The GfK NOP Consumer Confidence Index stayed put this month – but it was already at a low level, and Nick Moon, the Managing Director of GfK NOP Social Research talked about it having “stagnated at depths seldom seen outside of actual recession. The last time it was this consistently low was two years ago, and before then in autumn 1990.”
- The Bank of England reports that mortgage defaults are up, despite low interest rates and falling house prices. There is a “marked decline in households’ demand for secured credit to finance a new house purchase.”
- What do you know, debt advice agencies report that consumers must be lying awake at night worrying about debt because they’re seeing a big increase in the numbers ringing them after midnight.
- This is feeding through to business confidence – the CBI’s latest Distributive Trades Survey reported that “sales growth remains subdued” – partly because incomes are depressed.
- Dixons blames the VAT increase and cuts for poor sales; the Chief Executive of the Co-operative Group says that “consumers [are] feeling the squeeze on their spending,” which won’t recover until 2012; Signet, the US company that owns Ernest Jones and H Samuel, reported that confidence is much more fragile in the UK than the US and Moss Bros Chief Executive Brian Brick said that “the consumer is being very careful where and when they spend their money.”
- Lloyds Banking Group reports that business confidence is down, with the proportion of business reporting lower confidence this month than last rising from 36 to 44 per cent.
The falling demand for mortgages seems particularly important to me. If you think you’ve got a steady income stream ahead, this is a good time to buy a house or move up the ladder: interest rates are low and prices are stagnant, so the fact that people aren’t doing so is very significant.
And where’s all that debt going to come from?