UK consumer recovery is soundly-based and welcome
Simon Ward
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Having failed to predict the current economic upswing, the commentariat now decries the “wrong kind of growth”. A typical “argument”: consumer credit rose at an annualised rate of 6.0% in the latest three months, while average weekly earnings are up by only 0.7% over the past year; so consumers must now be “releveraging” to finance another spending splurge, even though debt is still at an unsustainable level.
Wrong, wrong, wrong. Consumer credit accounts for only 9% of the stock of household sector borrowing from banks, which is dominated by mortgages. Total borrowing rose by 1.5% annualised over the last three months and is only 1.0% higher than a year ago.
This borrowing rise needs to be compared with total income growth, not the increase in average weekly earnings. Solid expansion in employee numbers coupled with stronger self-employment and entrepreneurial income resulted in non-property-related earnings rising by 4.1% in the year to the second quarter. Borrowing, therefore, continues to grow more slowly than income.
Total household debt was 141% of disposable income at the end of the second quarter versus a 2008 peak of 170% – see chart. A judgement about sustainability should take into account the burden of interest service and the value of assets. Interest payments were 5.6% of income in the second quarter, a low in data extending back to 1987. The interest burden would remain below its post-1987 average of 8.6% even if the average interest rate on debt rose by 2 percentage points. The ratio of debt to wealth, meanwhile, is likely to fall below its post-1987 average of 17.4% in 2013, reflecting house and share price gains and saving.
So borrowing isn’t surging, incomes are growing respectably and debt is consistent with servicing capacity and wealth.
A consumer splurge? The volume of spending in the second quarter was no higher than in the second quarter of 2007. Is six years of stagnation insufficient for the killjoys?
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