UK Economy: Calm Down Dears, This Isn’t a Debt-Fueled Recovery

One of the functions of this column is to separate myth from reality. One myth, that the economy could never recover as long as the government was pursuing a deficit-reduction strategy. is being comprehensively disproved.

The latest evidence from the purchasing managers’ surveys of construction, manufacturing and services is that growth is at its strongest since 1997 and gross domestic product is on course for a rise of more than 1% in the fourth quarter.

Nobody should be too surprised by the return of growth: every modern-day British recovery has occurred against the backdrop of action to cut budget deficits. This time is no different.

Now that myth is being replaced by another, which is that the economy is only recovering because of a debt-fuelled consumer and housing boom.

The myth was given added impetus by a reporting error by the Bank of England a few days ago. Having initially reported that unsecured consumer credit rose by £411m in September, it rushed out revised figures showing that the correct total was, in fact, £864m.

Cue headlines about Britain embarking on a credit card binge or, worse, repeating the excesses that led us into the financial crisis. Some people got very excited.

Michael Winner is sadly no longer with us, but the only response to all this is “calm down, dears”. If we take the credit card component of the £864m, £151m, it was actually the lowest for five months, and below the monthly average since the financial crisis took its most devastating turn in September 2008.

Compared with the pre-crisis period, when credit card borrowing sometimes topped £1bn a month, the plastic is barely being flashed.

As for the wider picture, unsecured borrowing of £864m sounds a lot, but September is one of the two peak months in the year for new car-buying; along with March it is when registration plates change.

In September last year, partly as a result of this, unsecured borrowing hit £1.1bn. This year’s increase was smaller. As for rates of change, the amount of unsecured borrowing outstanding showed an increase of 3.9% on a year earlier but that is a pale shadow of the 13%, 14% and 15% growth rates of the pre-crisis period.

As always when it comes to household borrowing, it is necessary to look at the bigger picture, and that means mortgages, which account for 89% of household debt. The bigger picture shows that lending to individuals, including mortgages, has risen by just 1% over the past year, so is not even keeping pace with inflation.

The amount owed by individuals, £1.43 trillion on Bank figures, is lower in cash terms than in September 2008, and 15% lower in real terms. Far from going on a debt binge, households have bene quietly deleveraging.

You can see this in a number of ways. Real household disposable incomes are nearly 4% above pre-crisis levels but consumer spending is more than 2% below. Housing equity withdrawal, the amount people take out out of the equity in their properties for other purposes, supported consumer spending in the run-up to the crisis. But it has been negative since 2008 and in the second quarter of this year hit £15.4bn, its biggest negative since the crisis.

When this turns around maybe it will be possible to talk about echoes of the pre-crisis era, but not before.

Or, if you are still not convinced, how about this from Chris Williamson, chief economist at Markit, which compiles the purchasing managers’ surveys. The very strong growth in services last month was driven by financial services, computing and IT and business-to-business services, he says. Consumer-facing services, ranging from hotels, restaurants and catering through to hairdressing, were the weakest components of the survey.

None of this is to dismiss the importance of the consumer or an improved flow of credit – for both households and businesses – to the economy. Too much credit is dangerous but too little stifles growth to the point of stagnation.

An important part of the recent recovery story, probably the most important part is that the years of ultra-loose monetary policy, coupled with Funding for Lending and Help to Buy, are finally gaining traction. Stronger money supply growth, and the shift from negative to modestly positive credit growth, is supporting a strengthening recovery.

At some stage, particularly as rising mortgage lending feeds through to the numbers, household debt will rise.

Unless you are a Russian oligarch, Middle East potentate or Chinese zillionaire, you need a mortgage to buy a property. People entering the housing market do so by taking on debt; those leaving it, either for the Sunnyside retirement home or that great suburb in the sky, have paid off their debt.

The normal condition is for overall household debt to rise, though we should never forget that household assets, at over £10 trillion according to the Office for National Statistics, are more than seven times the total of outstanding debt.

That is for later. But if recovery so far has not been driven by debt-fuelled consumers, what has it been driven by? To the extent consumers have contributed, and they have, the absence of new crises and strongly rising employment – which may be about to get stronger – have been important counterweights to the squeeze on real wages.

Even more improtant, I suspect, is the delayed impact of very low interest rates. The windfall from drastic reductions in monthly mortgage payments was not initially spent by many households, partly because their confidence was battered into submission and partly because they feared low rates would not last.

Thursday marked the the 56th month at which the Bank’s monetary policy committee has held Bank rate at 0.5%. On the same day the European Central Bank cut its key interest rate to 0.25%. Even without forward guidance, people had guessed that rates in Britain were not about to rise. With it, they have become more secure in that belief, hence stronger spending, without so far any meaningful rise in debt. Forget talk of a debt-fuelled recovery.

This piece is cross-posted from with permission.