Many feel that the recession is ‘payback’ for the country’s past excesses – that we racked up huge debts, spent too much and we’re now paying for it.
It’s true that household debt soared in the past decade and the proportion of debt to income in the UK is among the worlds highest, but this wasn’t due to a surge in household consumption. Household spending, on average, didn’t rise any faster in the pre-crisis period than in the previous 40 years, if anything it slowed, as the graph shows. Retail sales, however, surged by 35% since the beginning of the decade, this was partly financed through unsecured borrowing. Until, that is, the credit crunch brought this type of lending to a halt.
So how will all this affect the recovery?
Well, retail sales volumes are still growing but have slowed considerably to around 1% in recent months. Meanwhile, data released earlier this week showed households are rebuilding their balance sheets by running down debts and saving more. The savings rate almost doubled in q2 and reached the highest in more than five years. Meanwhile, households repaid a net £0.3bn of unsecured loans in August, marking the second consecutive month of net repayments
In the long term this is good news as households undergo the necessary adjustments in their finances.
In the short term, however, it could hinder the recovery. If households choose to save at the expense of spending, company’s profits would fall and job cuts rise.
So far this has not been the case. Higher savings and debt repayments have come as a result of increases in disposable income (which rose by 0.9% in 2009q2) as lower mortgage interest payments and lower food and retail prices etc. have put more money in people’s pockets. Savings are expected to continue to rise in the future and, as the Bank of England pointed out last week, likely to stay higher than pre-crisis levels, on the back of persistent concerns about job security and tighter credit conditions. Since saving is always equal to investment, in the long run, higher savings would actually boost growth, all other things being equal.
So maybe ‘payback’ won’t be so bad after all.