Sorry to be a party-pooper, but this is the wrong kind of growth

 
Allister Heath

EVEN the Bank of England sometimes makes mistakes. It was forced to correct its most recent data on consumer borrowing yesterday, in a development that confirmed what many of us feared all along: credit is beginning to surge dangerously. Yes, the economy has rebounded; but in many ways we are seeing the wrong kind of growth. The UK, like it always does at such moments, is trying to borrow itself out of trouble; and it is individuals seeking cash to spend more on goods and services that are leading the charge, not companies attempting to raise funds to invest.

This is good news for retailers and restaurants but it is storing up trouble for the future. Net unsecured lending rose by £864m in September, taking the growth in the three months to September to an annualised rate of 5.8 per cent, the fastest since the bubble days of April 2008. That is much more than the increase in average wages – and it is significantly faster than the rise in household incomes (which also accounts for employment growth and an increase in the total number of hours worked). It is also faster than the rate of growth of nominal GDP. On all relative measures, therefore, unsecured lending is going up.

One possible explanation is that consumers are struggling because their real wages are falling so fast, and are now starting to borrow more merely to pay for essentials. The latest figures suggest that average nominal wages (including bonuses) rose by just 0.7 per cent across the UK over the past year, compared with retail price inflation of 3.2 per cent. This is a massive 2.5 per cent real terms pay cut, which follows several years of falling wages before that; at some point, many households are going to crack. Over the past ten years, the share of disposable incomes devoted to gas and electricity has risen from 1.8 per cent to 3.1 per cent, driven by higher prices rather than increased consumption. The pressures are immense.

But regardless of the reason for the increased borrowing – and a more positive spin would be that consumers are actually more confident, and thus ready to borrow – it is starting before the excesses of the previous bubble have been fully unwound. Had consumers undergone a proper deleveraging cycle, and slashed debt back to sustainable levels, it wouldn’t matter that they had started to borrow again. But debt levels were still far too high even before this latest rise in credit. There are also lots of zombies around, defined as borrowers that won’t be able to cope when base rates eventually return to a more normal five to six per cent, let alone higher.

Slowly but surely, mortgage lending – the other big part of consumer credit – is also roaring back to life, though the total number of transactions have yet to reach anything like the levels we were used to in the late 2000s. When that market recovers properly, bolstered by help to buy and all of the other pro-credit measures being embraced by the authorities, overall consumer debt will start to shoot up again as a share of GDP.

Again, the problem here is that house prices – while back to early 2000s levels outside of London when adjusted for inflation – are still significantly over-valued when compared to earnings (which have also fallen). Their recovery means that the growth in mortgage debt is being secured on increasingly over-priced assets – and that those people taking out loans to buy homes are at a greater risk. It’s not a pretty picture and it confirms that the supposed rebalancing – towards savings, growth led by corporate spending and exports – has turned out to be little more than a mirage. The only positive change is that construction is returning to life, but supply-side constrains are still blocking housebuilding from taking off properly. The economy is recovering, but it is impossible to be optimistic about the viability of this rebound.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath