Does UK growth mean we’re out of the woods?

Matching off reported UK household income and benefit receipts against the relatively robust level of expenditure and stated acquisitions of financial assets recorded in the national accounts for the 12 months to end September 2013, indicates that UK households (in theory) should have been obliged to borrow around £55bn net to balance their books. But according to the ONS flow of funds numbers, households ‘only’ borrowed £30bn, whilst the credit data from the Bank of England provides an even lower number for household net borrowing.

Pulling all the strands together, it seems that the household sector received around £25bn of ‘extraordinary’ receipts over the year, allowing it to increase its expenditure on goods, services and houses quite aggressively, without having to borrow quite as much as would otherwise have been necessary given the levels of income and income growth.

It looks as if at least £15bn of the £25bn came from compensation payments that were received from the banking system to the household sector, most likely dominated by PPI compensation pay outs, while the remainder looks to be accounted for by increased transfers from abroad (£3bn) and heavy foreign investment into the housing market.

Given annual UK personal consumption expenditure of some £1tn per annum, and UK net investment in housing of c£50bn, it’s clear that the PPI compensation payments and other transfers have been important in securing the UK’s positive rate of growth during 2013. But it’s also clear from the recently released ONS flow of funds data, and releases from the Ombudsman, that the bulk of the PPI compensation payments are now behind us and that even if the level of foreign interest in UK property and the level of transfers continue to increase at their recent rates, the household sector is going to need to find an extra c£100bn if it is to maintain its recent rate of growth in its expenditure.

On paper, this extra money could come from an improvement within the jobs market and in employment incomes but unfortunately this seems unlikely to be the case, and indeed according to the National Income data, during the third quarter of 2013, employment incomes stagnated despite reportedly better labour market conditions.  At the same time, net property incomes actually fell but tax payments also dropped, with the net result that there was a £10bn (annualised) increase in household disposable incomes. Logically, if these income trends were sustained into the early part of this year, then the only way in which household spending could match its 2013 growth rate during 2014 would be if monthly net household borrowing were to increase to £10bn per calendar month.  Sadly this was the rate of increase in borrowing achieved prior to the global financial crisis – but would be five times the current rate of lending.

Given the government’s various schemes that are designed to boost domestic credit growth, and the presumed improved situation within the banking system itself, it is certainly not impossible that lending growth will rise by enough to offset the loss of the PPI pay-outs. But this would be a risky assumption and we should all feel queasy if there is a government-supported return to building indebtedness.

The conclusion must be that based on the evidence, rather than on what we might hope, that we just don’t know if the UK economy has really broken out of the slump that followed the global financial crisis. As a working assumption, we suspect that lending growth will pick up further from here, but we doubt that it will pick up by enough to produce more than 2% real personal consumption expenditure (PCE) growth this year, which may come as a disappointment to some – and we need to accommodate this caution  in our stock analyses and modeling.