Comment: Household debt threatens return to spending

AN UPBEAT CBI retail report and a European Commission consumer confidence survey suggest a turning point has arrived – at long last – on household income and spending.

If true, and if the evidence proves more than a temporary blip, this has implications wider than the retail sector.

For the past three years all manner of statistics have pointed to a robust recovery in our economic fortunes. But this has failed to cut much ice with beleaguered households. The prevailing impression is that little has changed for the better. A combination of stagnant wage growth, relentless rises in energy bills and ultra-low interest rates bearing down on the spending power of pensioners has trapped us in a joyless recovery. Few have really felt better off, whatever the statistics might say.

But there is a growing body of evidence suggesting that consumer spending is picking up and confidence is growing. The EC survey may seem a thin thread on which to hang hope – it shows little change in the consumer confidence index – but the change in households’ financial position over the last year is the best since 2008, particularly among people working full-time.

And with the combination of rising real wages and record low fixed mortgage rates, the share of people that intend to buy (or build) a house rose in January to its highest since 2003.

Citigroup economist Michael Saunders had little doubt as to what this all means: “The feel-better factor is back.”

Last week also saw an encouraging CBI Distributive Trades Survey with retail sales holding up well in late December and the first half of January. Sales growth has been broad-based across sectors and particularly strong for clothing (at a 23-month high), while other strong-performing sectors included grocers, furniture and carpets. Retailers are also upbeat over prospects for February, with a balance of +42 per cent expecting sales to be up year-on-year.  

Global Insight economist Howard Archer said: “The prospects for retail sales and consumer spending overall for 2015 look bright given significantly improving real earnings growth, rising employment and elevated confidence. Consumers’ purchasing power should see marked improvement in 2015.” Low inflation, rising pay growth (albeit modest) and continuing growth in employment are cited as the main drivers.

But where is the evidence that this is more than a one-off fall in energy costs and sluggish wage growth? According to research by Oxford Economics reaching back to 1982, last year saw the largest improvement in spending power for nine years – and its forecasts suggest 2015 will be even better.

“We expect the index to rise at its fastest rate since 2001,” it says, “which would take its level to within reach of the 2009 peak. This suggests that the ‘cost of living crisis’ is finally drawing to a close.”

The group’s Spending Power Index has tracked real post-tax disposable incomes for median wage earners, those receiving jobseekers’ allowance and pensioners. Between 2011 and 2013 there was a slow improvement in spending power. While there was a relatively small decline in the index during the recession of the early 1990s, falling by 1 per cent over three years, the impact of the financial crisis was much greater. The largest falls came in 2010-11, when the combination of high inflation and weak earnings growth caused a significant squeeze on households. The index fell by 
5 per cent between 2009 and 2011.

However, last year saw a marked improvement in spending power. The index rose by 1.2 per cent over the year, with growth accelerating through the year to reach 1.8 per cent in December, comfortably ahead of average growth over the period since 2000.

“With inflation also dropping sharply, particularly over the latter part of the year, consumers have finally started to see their spending power improve again, which explains why consumer spending growth accelerated to a seven-year high in 2014,” says Oxford Economics.

“The effects of the most recent declines in the oil price are still to fully feed through, while the impact of lower input costs is continuing to feed along the supply chain.”

Adding in the belated cuts in domestic gas bills by the Big Six energy companies, “these factors are likely to push CPI inflation into negative territory as soon as February, while RPIX inflation is set to fall to just 0.6 per cent – the lowest rate on record.”

Overall, the forecasters suggest the Spending Power Index will increase by 2.4 per cent this year – the strongest growth since 2001 – and after allowing for population growth, the rise in consumer spending will be in excess of 3 per cent.

So: the “household spending squeeze” all over at last? Not quite. One big shadow cast over this is the high level of personal and household debt.

UK household debt has more than quadrupled since 1990, despite interest rates being at historic lows. And servicing this debt could pose a serious threat to the economic recovery, particularly when interest rates start to rise – widely expected to occur early next year.

In 1990, total household debt in the UK stood at £347 billion. But it has soared to £1,437bn in 2013, with people in their thirties and forties – the traditional high-spenders – carrying most of its weight.

The latest figures from the Bank of England last week showed a marked fall in net unsecured consumer credit to £578 million in December – half the November total. Net borrowing on credit cards was up slightly, but the increase in other loans and advances slowed markedly to £284m in December from £954m in November.

It is too early to say that increased purchasing power from low inflation and rising earnings has eased pressure on households to borrow. Despite the slowdown in unsecured credit in December, high consumer confidence means that people have become more prepared to borrow in recent months.

We could well be leaving the “cost of living crisis” behind. But the household debt crisis will remain a major brake on consumer spending growth. «