19 January 2017
Spend, spend, spend
Should we emulate Viv Nicholson or Mr Micawber?
by Frank O’Nomics
On winning £152,000 on the pools in 1961 (the equivalent of over £3 million now), Viv Nicholson told the world that she would “spend, spend, spend”. This year’s Christmas sales figures for shops in the UK suggest that the whole nation has adopted her mantra, and official data points to people spending ever increasing amounts of money that they don’t have. How can this be happening when the young should be saving more to get on the property ladder, and older generations need to put away greater sums to make up for shortfalls in their pension provision? The level of consumer debt has hit a level which is starting to worry the Bank of England (to the extent that it is seen as a bigger risk than Brexit), and if we were to slip into a recession such a back drop could make it last longer and be much deeper. There is also the chance that a sudden retrenchment of consumer spending, possibly resulting from a much heralded pick-up in inflation, could be the very tipping point for the economy.
For shops themselves the situation currently looks very positive. The list of impressive Christmas stories extends through Tesco, Mothercare, Debenhams, Moss Bros, SuperGroup and dozens more. On the face of it, that is not unusual, but in some cases the extent was very impressive, with Majestic Wine having its biggest Christmas ever, M&S seeing its first rise in underlying sales growth for 6 years and the likes of ASOS an 18% increase over the last 4 months. There were some underperformers (Next and Primark were indifferent), but retail sales hit a 14-year high in October and the British Retail Consortium has reported December spending 1.7% higher than last year.
Let’s be clear. This is not spending that is being generated by rising incomes. Credit growth has, according to Alex Brazier of the Financial Stability Committee, contributed £20 billion out of £30 billion of additional spending flows. Consumer borrowing is growing at its fastest rate for over 11 years, having been rising at a rate of 10% for some months. So why is this happening?
Much of the willingness to spend so readily has to be put down to the continuing availability of cheap credit. While the Bank of England may be concerned about credit growth now, they were more concerned by the prospects for a rapid slowing in the UK economy after the Brexit vote, so that they both cut rates (by 0.25%) and freed up £150 billion of lending. In addition, commercial lenders helped to increase the availability of cheap credit by introducing measures such as the doubling of interest free introductory periods on credit cards. The problem for the Bank of England is that this is a difficult genie to put back in its lamp given that, while it can influence mortgage markets, it has little scope to contain consumer credit.
There are a number of other factors at play. The combination of sustained strength in the housing market, together with daily new highs in the equity market, is having a considerable wealth effect. People may not be earning much more (average earnings growth remains a sluggish 2.0%) but they feel wealthier – a factor that is enhanced by the level of unemployment, which has fallen from over 8% to under 5% over the last 3 years. You might also argue that the millennial generation, despairing of being able to save the kind of sums needed for a mortgage deposit, are spending all that they earn. That is true to some extent, but the numbers for mortgage borrowing are still also very strong. In fact, the number of first time buyers is at a 10 year high, also largely due to the low level of interest rates, up 7% on last year. Again the state has played a part in this side of the expansion of household borrowing, with the Help-to-Buy scheme accounting for almost half of the sales of newly built properties. First time buyer mortgages have also got cheaper, falling to around 2.5% for the first 3 years.
There is an argument that says that none of this should really be a problem. If interest rates remain low and employment is high, the debt will be serviceable. Further, while total household debt levels are high, at 133% of household income, this is still well below the pre-crisis peak of 151%. However, the problem is that the number is rising and there is little that the authorities can do about it. The Bank of England may be keen to continue to keep interest rates low (although Mark Carney this week acknowledged that the next move could be up), but consumers are likely to be hit just as hard by the prospective rise in inflation as they would be by a rate rise. Inflation rose from 1.4% to 1.6% last month, the highest level for two and a half years. It is likely to exceed the bank’s 2% target next month, and hit 2.5% later this year, or even higher if this week’s further fall in sterling is sustained. Given that average earnings are only growing at around 2%, real incomes are likely to be turning negative soon and for an extended period. The need for households to spend less and so reduce their debt levels is then a real danger for the economic outlook.
There you have it. You can either adopt the lifestyle of Viv Nicholson, or the recommendation for happiness of Dickens’s Mr Micawber:
“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
Someone should have offered him a credit card.
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