Chief Economist’s Weekly Briefing – Looking ahead to the past

The UK’s propensity to borrow too much and save too little has echoes of the recent past. Yet investment is up and there’s little sign of imminent danger. Still, the Bank of England’s Financial Stability Report worries the past may be ahead of us.  


Weak and wobbly. As we approach the tenth anniversary of the global financial crisis the scars still linger. In Q1, UK gross domestic product per head, the best measure of how much each of us earns on average, was flat compared to Q4 2016. It was only 1.8% higher than at the start of 2008. The total amount of income generated continues to rise – up 0.2%q/q – because we’re putting in more hours at work, not because we’re becoming more productive.

Save us! The headline grabber when the national accounts were published last week was that the saving ratio – the share of our income that we don’t spend – had fallen to a record low of 1.7% in Q1. Clearly the profligate UK consumer has decided to spend more despite the squeeze on spending power from higher inflation and weak wage growth? The truth was a little more complicated. The main reason that the saving ratio fell was a sharp rise in taxes paid. In fact, the £5.0bn rise in taxes was almost twice as much as the increase in consumption.

A good start. The call for Britain to build more houses and boost investment is an old one, yet often ignored. So figures showing an increase investment by businesses and on dwellings are welcome. UK businesses invested £44bn in Q1, up 0.6% on Q4 2016, with a further £16.5bn in dwellings, a rise of 3.1%. Firms in the UK’s service sector are the heroes, in particular, hoteliers and restaurateurs, who boosted investment by 23%q/q. Overall, these are decent set of figures, nothing more. Investing for the future is a long term game.

Full steam ahead. There’s little sign of a slowdown in UK consumer credit, with the annual rate of growth running at double digits (10.1%) in May. Overall, UK households have built up almost £200bn in consumer credit debt. So far, there are few obvious signs of stress, with the share of borrowers falling behind in payments fairly stable. Yet average pay is rising by a little over 2% p.a., far slower than the rise in consumer credit. So the debt burden keeps building.

Reduce speed now! The rise in consumer credit has not gone unnoticed. The Bank of England’s Financial Stability Report raised concerns and highlighted the dangers of assuming the future will resemble the present. So to bolster bank’s defences for when a less rosy future comes, it ordered them to increase the capital they hold as a share of their loans and other assets. It also wants evidence that banks have prepared for a range of possible outcomes to the Brexit negotiations. Particularly timely, it’s reviewing how to gauge the vulnerability of our financial system to a cyber attack.

Overshadowed. London’s performance often overshadows the rest of the UK. For example, the UK housing and mortgage markets are broadly stable. Prices rose by 1.1% in the month to June, according to the Nationwide, while the number of mortgage approvals rose in May. The number of approvals is the same now as it was in the year preceding the EU referendum. So perceptions that the housing market is on the turn largely stem from London, where prices fell 2%q/q in real terms in Q2. Yet with London prices over 50% higher than their 2007 peak, a slowdown here may be welcome.

Overdrawn. The UK has a current account. Only in this instance it’s the flow of money to and from the rest of the world. And we’ve been overdrawn every quarter since 1998. In Q1, we were £17bn in the red, or 3.4% of GDP, about the post-2007 average. Yet while we used to gain more on our investments overseas than we paid foreign investors, not any more. Poor non-UK returns have encouraged greater overseas investment in UK assets. This tends to be beneficial as it boosts general investment, yet it also increases the money we owe others and lowers our current account balance. All this is manageable so long as the UK remains an attractive place to invest.  

Not yet great again. It’s difficult to pin down just how quickly the US is growing as numbers that should deliver the same economic growth rate give different answers. But regardless of which you choose growth is pretty pedestrian. It looks as if the economy expanded at an annualised rate of 1.2% in Q1, which put US performance a nose ahead of the UK. The encouraging news was that the strongest growth was in exports and investment, with the US consumer punching below its weight. 

Executive decision. Northern Ireland’s political impasse has been hitting charities and other third party organisations hard.  That’s according to the Ulster Bank and CO3 3rd Sector Index. Almost one-third of organisations reported a reduction in government funding in Q2. That’s up from 17% in the first quarter.  And most leaders (76%) of third sector organisations state that the lack of an Executive has had a negative impact on their organisation. These bodies provide a range of services from care provision to skills development. An Executive in place to agree a budget is one important part of the jigsaw for the economy, and the recently announced £1billion extra in funding from Westminster will no doubt be helpful. But we also need to see effective policies and delivery.

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