Growth up, household income flat – this doesn’t feel like a recovery
The ONS’s monthly Economic Review has become essential reading – the best, concise and timely summary of the important trends in the economy with interesting and impartial analysis. It also usually has lots of good charts. And I really like a good chart.
The latest issue paints a picture of an economy which is growing but where that growth has not filtered through into rising living standards.
To start with the good news, the economy is growing:
But that growth remains unbalanced – whilst the service sector has regained its pre-recession peak, the production and construction sectors remain well below their highs. And overall GDP is still firmly below its 2008 level.
In the construction sector, the detailed picture is interesting.
Private sector activity fell off a cliff in 2008/09 and after staging the beginnings of a recovery in late 2009 and early 2010 has essentially stagnated. Public sector activity rose sharply under the previous government’s fiscal stimulus but has been cut back since early 2011 as the austerity programme began to bite.
Meanwhile the recent pickup in retail sales has been associated with an increase in unsecured borrowing by households.
As the ONS put it:
This pick-up in retail sales growth has followed an increase in net unsecured lending to consumers. The stock of unsecured credit fell between late 2008 and mid-2012, as households deleveraged in the light of the uncertain economic outlook. This trend reversed in early 2013, as households responded to the changed economic situation and a general easing of credit conditions by increasing their net borrowing.
In other words, from late 2008 until mid 2012 households deleveraged and the economy stagnated, since then households have become to gear up their debt levels again and the economy has expanded. Or, in even simpler terms, we appear to be heading back towards consumer-led and debt-fuelled growth – the ‘old economic model’ that the current Chancellor was once so keen to move away from.
The increase in retail sales since mid 2012 has certainly not been associated with a rise in household income. As the ONS say:
While retail sales appear to have picked up during 2013, there is little evidence of a sustained improvement in the economic position of households. In particular, Real Households’ Disposable Income (RHDI) has changed very little since Q2 2009, despite cumulative real GDP growth of 4.2% over this period.
So whilst the economy has grown by over 4% in the last 4 years, households’ real disposable income has been basically flat.
The Chancellor’s key economic argument on living standards has been reduced to ‘get the economy working and growth will lead to higher living standards’. The ONS though seem a bit sceptical.
…it is difficult to assess whether the relationship between GDP and RHDI growth has changed in recent periods. Figure 7 plots the quarterly growth rates of these two variables over a much longer time horizon and offers some broad conclusions. Firstly, between Q2 1955 and Q3 2009, periods of GDP growth were associated with periods of RHDI growth – although the relationship is not a strong one – as summarised by the upwards sloping trend line in Figure 7.
On average between Q2 1955 and Q3 2009, growth in real household income has been stronger than the growth of total output. However, in the period since Q3 2009, there is little evidence of a positive association between these two variables. Output growth has been relatively weak over this period, and real households’ disposable income has changed relatively little, providing little evidence of any association.
The red points on the chart are fascinating. Whilst we don’t yet have enough data to draw very strong conclusions, it does appear (to me) that the relationship between GDP growth and RHDI, never a strong one, has weakened in the current recovery.
Finally the ONS have some very interesting things to say on household expenditure
The weakness of real household income growth since late 2009 in particular has put pressure on household budgets and limited the extent to which consumers have supported aggregate economic growth through consumption. Household budgets have been squeezed by recent increases in the price of household goods. In particular, demand for gas and electricity is relatively price inelastic, and as a result the recent increases in the cost of energy have taken a larger share of disposable incomes.
Table 1 shows the proportion of household disposable income (HDI) accounted for by several ‘household essentials’ between 2003 and 2013 in current price terms. It shows that the proportion of HDI accounted for by these goods has risen from around 19.9% in 2003 to 27.3% over this period. While the majority of this increase has been in the cost of housing – which has increased from 14.7% to 20.6% between 2003 and 2013 – there have also been increases in the proportion accounted for by gas, electricity and water & sewerage. The rise in these proportions has the effect of reducing household budgets for spending on other goods and products.
The overall picture then is of an economy that is growing but that remains unbalanced, of a country returning to the ‘old model’ of consumer -led growth whilst household budgets are squeezed, borrowing increases and an ever greater share of stretched personal finances are taken up by essentials. This doesn’t feel like a recovery for most.