Nowhere slowly: failures on private debt follow failures on public debt
Today’s figures confirmed what we already knew: that economic growth in 2016 was entirely reliant on the consumer.
We also know that workers are in the middle of an unprecedented decline in real wages (at least since Victorian times).
So the inevitable result is lower saving and increased growth in consumer credit and other unsecured borrowing (bank loans, student loans, loans for cars, payday loans etc). Today we found out by just how much.
The saving ratio for 2016 at 5.2% was at its lowest since record began in 1963.
Unsecured borrowing rose sharply to 39.6 % of household income from 36.7 % in 2015; this is the highest figure since before the financial crisis in 2008 (chart below).
The increase was driven by consumer credit (as reported by the Bank of England), student loans and also a very abrupt increase in borrowing from non-UK banks (which is not in the Bank of England figures). The OBR see unsecured borrowing exceeding the pre-crisis peak as soon as next year.
Unsecured borrowing, % GDP
And chillingly we heard earlier this week that demand for the services of StepChange the debt relief charity has never been higher (see their 2016 Statistics Year Book). They emphasise that rises in debt were driven by those on lower income:
“The average debt of our clients earning less than £30,000 increased by £569, to £12,897, in 2016. Over the same period, the average debt of clients earning more than £30,000 decreased by £2,160 to £29,340. Because those earning less make up a far higher proportion of our client base, this means that for the first time in eight years the overall average unsecured debt of our clients increased, from £13,900 to £14,251.”
And while the Bank of England has been cautious up to now, earlier this week the Times reported that they have now announced a review into whether the UK’s biggest banks have let their lending criteria become too loose.
(I omit corporate debt from the discussion for reasons of length, but any deleveraging here is limited, and again there was a rise into 2016.)
George Osborne’s pledge
You will recall George Osborne’s pledge in the run up to the 2010 General Election (on 24 February 2010, just after the 20 economists had written to the Sunday Times castigating the Labour Government for inadequate efforts on austerity):
We need to head in a completely new direction.
We have to move away from an economic model that was based on unsustainable private and public debt.
And we have to move to a new model of economic growth that is rooted in more investment, more savings and higher exports.
Unquestionably this new direction never materialised; there has only been more of the same old model.
The chart below shows just how skewed the economy is towards the old direction. In 2017 consumer demand accounted for virtually all (95%) of GDP growth. Even ahead of the financial crisis the reliance on consumer demand was not so extreme; in fact it has been more extreme on only six occasions since the war (2002, 1992, 1986, 1962 and 1958). Negative net trade and the first annual decline in business investment since the financial crisis were only partly offset by government current expenditure and other investment (i.e. government investment and private housebuilding).
GDP expenditure measure: contributions to real growth, percentage points
Source: ONS and author calculations
In the meantime the public debt has gone in completely the wrong direction. The chart below compares outturn and the latest projection with the fanciful predictions made when the coalition government took office. Rather than peak in 2013-14 at 70% of GDP, the public debt ratio is now expected to peak in the current financial year at 88.8% of GDP. (And of course, that’s no certainty.)
Public debt as % GDP
The government’s policy has failed on both fronts, public debt has failed to fall and private debt is rising again.
These failures are not unrelated. As repeatedly argued, government spending cuts have hit economic growth harder than expected; weaker growth has meant weaker household and corporate incomes; weaker incomes have meant weaker tax revenues for the government; weaker tax revenues have meant higher borrowing than planned, which translates into a failure to reduce the public debt ratio.
Then for households, higher spending growth leads to higher borrowing and rising debt given persistently weak income growth.
It is unclear what has provoked households to behave in this way. Undoubtedly there are a number of explanations. Perhaps some have been tempted by easy credit terms – for example commentators have emphasised the high growth in car loans. Certainly, as StepChange report, some are borrowing to get by. (Perhaps too the ONS data may exaggerate certain features – we must always remember that the National Accounts are statistical estimates, subject to sampling error as well as partly depending on human judgement.) In the meantime, looming ahead are rising prices and resumed falls in real wages.
Whatever the explanation, this is no way to run the economy.
The macroeconomic case against government spending cuts has always been the likely disproportionate harm on the economy. And the reverse is also true: higher government spending growth would strengthen the economy. A stronger economy would then mean stronger income, and not only improved government finances but also more affordable household spending.
As the government starts the process of withdrawing from the EU, it is imperative that these lessons are learned. But as usual there is only bravado about a seriously below par and unbalanced performance, and we remain on a dangerous course.