The big news in today’s new forecasts is the slashing (yet again) of the OBR’s growth estimates. But looking further into the detail, something else interesting is going on beneath the surface – the OBR seems to be changing its view of household borrowing and debt.
Today’s new numbers show that the OBR now expects the wage squeeze to persist into 2014 (they had originally thought real wages would be growing by now).
As they write in their Outlook:
We now expect real disposable income growth to be weaker than in 2012 and only slightly positive in 2013 and 2014, before picking up from 2015 as productivity and nominal wage growth pick up and price inflation falls back towards 2 per cent
The OBR seems pretty clear that it doesn’t envisage a rapid recovery in household incomes – which is what makes the following line, tucked away on page 59 of the report, so significant:
we do not expect a rapid return to pre-crisis rates of debt accumulation, given revised bank and borrower risk appetite.
The OBR is saying two things here – (i) they expect household income growth to be weak and (ii) they now don’t expect households to run up debts at anything like the pace they previously did.
This quite a change from their previous view. The chart below shows the household sector’s net lending to other bits of the economy as a percentage of GDP. If this number is positive households are net savers, if it is negative they are net borrowers.
The red line is the new forecast from today, the blue line is the forecast as they were two years ago in November 2010 (that forecast only runs until Q1 2016).
As can quite clearly be seen, back in 2010, the OBR expected households to become borrowers in late 2010 and continue borrowing to help power consumption. That didn’t happen in 2011 or 2012 (one reason behind the weakness of growth) and the OBR now doesn’t expect it to begin happening late 2016.
I wrote back in October that the best way to estimate the medium term path of the Uk economy was to concentrate on household income growth and household borrowing and outlined three scenarios:
- First, and most preferable but most unlikely, we get strong growth in real incomes as inflation falls back towards 2% and wage growth increases. If that happens consumption growth will be stronger and the economy will grow at a decent pace.
- Second, and what I think is the most likely outcome – my central ‘forecast’ if you will – household income growth will be weak and the savings ratio will not drop by much. The result will be weak consumption growth and an economy that is growing, but growing slowly – in the order of 1-1.5% a year. In historical terms of recovery from recession this is pretty much a disaster.
- Third, it is possible that we still get weak income growth but that the savings ratio drops rapidly. In this scenario we’d see faster consumption growth and hence faster overall growth. This however would be accompanied by a big increase in household debt. It might give us 3 – 4 years of decent growth, but at the risk of increasing the financial imbalances that got us into trouble in the first place.
I hope for the first outcome, expect the second and worry about the third.
The OBR had been (quietly – as Nick Pearce notes the private debt forecasts are rarely discussed ) forecasting the third scenario (as Aditya Chakrabortty wrote in this week’s Guardian) – that household income growth would be weak but that households would borrow to support a pickup in consumption.
They are now shifting to the second scenario – weak household income growth coupled with weak household borrowing. The results of this shift can be seen in the new growth forecasts and, as I argued in October, growth at this level is a ‘disaster’.