A CONSUMER boom fuelled by spending our savings can’t last – particularly when real wages are still so low, writes Alf Young
Before the festive season really peaked, the Financial Times carried a provocative piece in praise of consumption. Beneath a headline asserting: “Consumption is for life, not just for Christmas”, the FT’s economics editor, Chris Giles, defended this it as the essential “purpose” of all economic activity.
Consumption, he argued, “allows us to meet our material aspirations in the pursuit of happiness”. Giles didn’t stop there. He hit out at a “puritanical streak” stalking our economic debates, one that worries that debt-fuelled consumption got us into this mess we’ve been in these past five years and cannot conceivably be the answer to getting us back to more secure economic times.
“It is also deeply patronising”, he charged, “for those with reasonably comfortable incomes to fret that the little people are consuming too much for their own good or for that of the wider economy.” Now that Christmas is over for another year and Hogmanay beckons, festive consumption is in full swing. So, are we all ignoring George Osborne’s desire for a “responsible recovery”? Are we simply slipping our material aspirations off that tiresome austerity leash?
Who really knows? Bargain hunters, we are told, were up in the wee small hours of Boxing Day morning, queuing in dreary weather, long before shop doors opened. But many of these same stores had started discounting stock long before Christmas Day dawned, suggesting sluggish sales in the weeks leading up to the big day.
However many billions have been splashed in store and online by now, we will all have to wait until retailers produce their first festive sales estimates to discover whether the masses have actually heeded Chris Giles and consumed their way to happiness.
We already know that domestic consumption has, contrary to the intentions of finance ministers and central bankers, been the main driving force in the economic recovery across the UK that began to take hold last spring. Bold post-crash political rhetoric about rebalancing the economy in favour of exports and business investment has largely failed to deliver so far.
However, if household consumption is to continue to be the mainstay of recovering growth in 2014, how is all that additional demand for goods and services to be funded? As the Oxford economist Simon Wren-Lewis noted the other day: “The recovery this year is in large part because the savings ratio has begun to fall.”
The UK savings ratio more than halved this time last year, in the space of three quarters. It is showing signs of falling again. The large increase in saving since 2009, in response to the great banking collapse, was, Wren-Lewis notes, “a major factor behind the recession”. But now that we are saving less and – given rock-bottom interest rates – beginning to borrow more again, the additional consumption that all buys is currently driving what recovery we’ve seen.
How sustainable is that, especially if the much-vaunted rebalancing of our economy towards investment and exports fails to materialise? To begin to answer that question, we have to consider the state of the jobs market and what people get paid for the work they do. Answers to these deceptively simple questions dictate how much individuals and families can spend and how much they can really afford to borrow.
If all you ever consider are the monthly labour market statistics, the world of work across these islands is in much better shape than it deserves to be after the great crash and the sluggish recovery since. Employment levels are rising and jobless rates are falling. But that’s only part of the answer.
One of the great conundrums this time is how so many people have managed to stay in jobs or even find new work, when how productive they are when they get there has been on the slide. In 2012, UK output per head was 12 per cent below its 1950-2007 trend. As another FT columnist, Martin Wolf, succinctly puts it: “The one ameliorating factor, low joblessness, is a mirror image of the productivity collapse.”
But that trade-off also means, for many, depressed wage levels and casualised working conditions. It’s happening elsewhere, too. I see McDonald’s has been advising its US workers to dig themselves out of their holiday debt hole by selling some of their unwanted presents for quick cash on eBay or Craigslist.
Here, the UK government’s arm’s-length forecaster, the Office for Budget Responsibility (OBR), has even been putting some numbers on the protracted wage trap many workers now face. Like most economic forecasters, the OBR was ratcheting up its near-term forecasts for GDP growth, its expectations for wages have been heading rapidly in the opposite direction.
The Resolution Foundation has gathered all the OBR’s forecasts for wages in some revealing graphs, now also available on the Flip Chart Fairy Tales website. Back in November 2010, the OBR forecast real average earnings, which started shrinking in 2008, to begin to grow again by mid-2012. In their latest forecast earlier this month, they don’t expect that to happen until mid-2017.
That’s when real average wages are adjusted by the CPI measure of inflation. On the old RPI measure, in the latest OBR forecast, wages have already hit a floor more than 5 per cent below where they were before the crash. They are forecast to stay at that depressed level as far ahead as the OBR dares forecast. We are talking, in terms of median weekly earnings, of a loss of some £61 a week by 2018 from where such earnings were a decade earlier.
If that’s what really happens, a consumption-led recovery will only be possible if more people not only save less, but borrow a lot more, too. However, if they do that, they should be mindful that current borrowing costs can’t stay this low for ever. Central banks have set their rates near zero ever since the crash. Next month, the US Federal Reserve starts tentatively unwinding its version of quantitative easing, by printing fewer dollars.
But at some point, their interest rates will rise, too. The Bank of England’s new governor Mark Carney has said that will not start here until the unemployment rate falls to 7 per cent. Earlier this month, the UK rate fell again to 7.4 per cent. The Scottish rate stood at just 7.1 per cent. On current trends, a rise in UK bank rate can’t be that far off.
But in an economy where the number of people in poverty in working families is now greater than in workless and retired families combined, any rise in borrowing costs in already-indebted households could prove disastrous. Were that to happen, the last thing this consumption-led recovery would lead to would be more happiness all round.