The State of the Recovery
Some key points and charts from the report are summarised below (with direct quotes in italics).
Taking the good news first – output is increasing:
But this comes with two important caveats about the composition of that growth and the impact on living standards.
The Review paints a picture of growth led by consumption:
Serious questions can be asked about what is driving consumption growth.
The broad picture since early 2012 has been of a falling household savings ratio and squeezed real incomes. Q1 this year was depressed and Q2 boosted by the timing of bonus payments around the 50p tax rate cut but:
“The jump in the households’ saving ratio from 4.4% to 5.9% between the first and second quarters largely reflects this timing effect of bonus payments, as households’ smoothed their consumption relative to the erratic path of incomes. Over the first half of 2013, the average households’ saving ratio of 5.2% was lower than the ratio of 6.8% in 2012, reflecting households’ desire to maintain their spending in the face of slower income growth.”
Meanwhile the squeeze on real incomes is getting worse:
“Figure 2 shows contributions to the growth of RHDI since the beginning of 2012. The most recent fall reflects the impact of changes in taxes and benefits in particular. Growth in disposable incomes during 2012 was supported by the substantial uprating of benefit payments in April 2012, which was determined by the September2011 rate of CPI inflation of 5.2%. By contrast, in April 2013 benefits were uprated on the lower rate of inflation of 2.2% in September 2012.”
Consumer borrowing is on the up:
“Data from the Bank of England suggests that some of this latest increase in expenditure has arisen as a result of higher household borrowing. Figure 8 shows changes in net unsecured lending to households accounted for by credit cards and other forms of unsecured credit. It suggests that while consumers continued to use their credit cards throughout the economic downturn – and have continued to do so in the most recent few months – there has been an increase in the quantity of credit derived from other forms of unsecured lending. As reflected in the jump in the saving ratio, households deleveraged between 2008 and 2011, reducing their exposure to non-credit card unsecured debt. However, from mid-2012 onwards this trend has reversed. During the year to July, households increased their unsecured borrowing by almost £5.4bn.”
“The cause of this switch is unclear, but one factor is likely to be recent falls in the interest rates on personal loans. While the rates for personal loans of up to £10,000 have been on a broadly downward trend since late 2009, the rate for smaller loans fell quite sharply at the end of 2012. These may be indicative of the effects of the Funding for Lending Scheme which was announced in July 2012, although it is difficult to identify the impact of this scheme and that of a more general easing of credit conditions.
The change in household behaviour over the past year may be associated with the performance of the housing market. House prices have been rising since 2011, and this may in turn have influenced household confidence and expenditure.”
In other words, the recovery is increasingly based on consumer spending an that spending is based on debt.
Can ayone remember the Chancellor’s much heralded ‘new economic model?’
As the ONS note, outside of the car industry, there is little sign of any real rebalancing:
“While the recent increase in output growth has been widely noted, it is not clear how broadly based the recovery has been, with some parts of the economy growing more strongly than others. This section explores some of the characteristics of the economic recovery from this perspective. Firstly, while the growth over the most recent few quarters has been spread across the main sectors of the economy, both the Manufacturing and Production sectors remain well below their pre-2008 levels of output. Much of the recent strength in Manufacturing, in particular, has also been concentrated in relatively few sectors. Figure 6 shows the path of Manufacturing output since the beginning of 2007, both in total and excluding the Transport Equipment sector, which is mainly accounted for by motor vehicle production. It indicates that while Manufacturing output as a whole has been broadly stable since mid-2010, the Transport Equipment sector has played an important role in sustaining output over this period.”
The picture for investment is even more concerning:
“Secondly, recent growth has been concentrated in household expenditure rather than in investment… the proportion of total expenditure accounted for by spending on investment has fallen from an average of 13.5% in 2007, to an average of 10.9% during 2012 and to 10.4% in Q2 2013: the lowest level recorded since the 1950s. This compares with 14.1% in France, 16.7% in the United States and 17.9% in Canada. Across the G7, investment accounts for an average of 14.6% of Gross Final Expenditure.” (My emphasis)
Taken all together, what does this does this say about the state of the recovery?
Output is growing at a healthier pace but it is being led by consumption, that consumption is fuelled by borrowing and may be assocaited with a pickup in the property market. Investment has collapsed to its lowest level in decades and outside of the car industry there is little progress on rebalancing. Meanwhile living standards remain squeezed with real disposable income falls picking up pace.
For most people this doesn’t feel like a recovery.