Coffee House

Why Osborne’s recovery might not be based on debt

31 January 2014

Is George Osborne’s recovery a credit-driven illusion? Many of his critics says so, and ask – as this magazine did two weeks ago – why we still have emergency interest rates at a time when the economy seems to be booming.

One thing we learned from the crash is that cheap debt and housing bubbles can end in disaster, and with his interventions in the mortgage markets, it looks like Osborne could be blowing a bubble now.


But striking research suggesting otherwise was released today by Citi’s Michael Saunders, Coffee House’s favourite economist:-
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Citi’s research found that the economy’s growth has happened while the private sector has been paying down its debt. The ratio of household debt to income is back to 2003 levels, and the ratio of companies’ bank deposits to debts is the highest for 50 years. Even first-time buyers, when they get on the ladder, are only spending 11 per cent of their income on mortgage repayments. And now that the economy – and nominal GDP – is growing, the incentives for companies to save is diminishing. They’ll start spending on wages, jobs and investment, fuelling the recovery.

Saunders’ graph above clearly shows the credit-driven growth in the Brown years. It may be obvious in retrospect, but nobody seemed to notice at the time. The crash has shown how little we know about the economy and how little the measurements we have provide clear, unambiguous signals that we’re in danger – or out of it.

Just as things went badly wrong under Brown, it’s possible they’ll go badly right under Osborne. With today’s figures from ONS showing that real wages have been falling since the general election, and another one coming up, he’ll be hoping so.

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  • sima

    If the present growth is not debt led, there is no reason stopping the
    government and the Bank of England increasing the present 0.5% emergency
    bank rate. This would give us life long savers a break

    کرکره برقی

    کرکره برقی
    درب پارکینگ

  • Mynydd

    If the present growth is not debt led, there is no reason stopping the government and the Bank of England increasing the present 0.5% emergency bank rate. This would give us life long savers a break

  • Baron

    John, could you or the clever people at City explain to Baron: Debt down across the board, real wages down, capex down, so what’s fueling the growth?

    It may be a merely statistical blip, after five years of contraction consumer spending, the largest element of GDP, was bound to turn up for people need to replace things like cars, carpets and stuff. This will not last, it will certainly not last till the election next year unless real wages perk up, debt trend reverses, and the corporates begin to invest.

    • Makroon

      Employment and hours worked have both been increasing smartly, and tax rates for some have been falling. Business borrowing is still falling slowly, but investment is now increasing. Business has large reserves.

      • Baron

        What is the miracle component that fuels the growth then, Makroon?

        It’s a bounce from the massive 7% drop in GDP from the peak level as the financial insanity burst. You’ll see.

        • Makroon

          The “dead cat bounce” was in 2010.
          The “miracle component” fuelling growth is a return of business and consumer confidence.
          That’s why so many Labourites, UKIPpers and others wishing the country to fail, are so eager to talk everything down.

  • Daniel Maris

    So credit led growth under Brown is indicative of things going “badly wrong”. But Thatcherite credit led growth is? – seems to be OK. :)

    I can’t from that graph see what is wrong with credit led growth if your economy grows and you retain most of that growth in the productive base of your economy.

    However, what is really at issue is how much of our GDP growth is “the right type of growth”. The particular feature of growth in the early 21st century is that it seems to have become disconnected from personal well being for the average citizen. We have the paradox of people getting poorer in terms of disposable income even as the economy grows.

    We need a new measure: GDPC – gross domestic product of citizens (i.e. excluding immigrants and business visitors). My contention would be that if you look at that it has probably been in decline for a good ten years, and is continuing to decline.

  • ohforheavensake

    Nope- kind of misses the point. The recovery’s being fuelled by a falling household savings ratio (which isn’t the same as saying it’s fuelled by debt)- and it’s this, rather than the amount of credit in the economy, that’s the problem. Indeed, one might say that another facet of our troubled economic performance is too little credit- banks are still not lending to SMEs at anything like the rate we need (and indeed bank lending is falling).

    And, as Duncan Wheldon makes clear here, there are quite a few reasons to be concerned about the recovery-

  • BarkingAtTreehuggers

    How about you chaps stop talking and instead publish figures for M1 to M4 like in the good old days?

    • the viceroy’s gin

      Don’t be ridiculous. What need have the Speccie kids for serious fiscal and monetary analysis? It’s not like this is a serious publication, is it? And we wouldn’t want the poor Speccie kids to possibly overtax tax their intellects. They might slip and hurt themselves.

      • ohforheavensake

        And also because trying to control the money supply was tried in the early 1980s- and it didn’t work. The Thatcher government found the policy unworkable, so first of all they moved from strict monetary controls to looser ones, and then the policy was abandoned altogether.

        • Daniel Maris

          That’s right – but never let facts get in the way of the mythic narrative.

        • BarkingAtTreehuggers

          Unworkable? Who am I addressing here – it is ‘unworkable’ to control money supply M1 to M4? Are you in _sane?

  • Smithersjones2013

    Hmmmmm? Of course the graph could just reflect the enforced effects of the credit crunch (and the lack of returns given how low interest rates are) and in reality there is in fact a latent demand for credit that will take up any slack should the financial institutions relax their attitudes to lending. Still its better than the average spin I suppose

    You could sum it up very succinctly by saying:

    It’s Austerity Stoopid”

    PS Woe be it for me to point it out but the bit where the economy is growing again is the bit where credit starts rising again so it hardly seems to prove anything. Still its a clever way to edit the graph axis to fit the spin

  • Mike Barnes

    “Saunders’ graph above clearly shows the credit-driven growth in the Brown years.”

    The Brown years had a much smaller credit boom than the 1980s though…

  • the viceroy’s gin

    ….er… what is this “Osborne recovery” you speak of?

  • monty61

    First time buyers spending only 11% of income on housing? Shome mishtake shurely? What’s the reference to that one?

    It also occurs to me that in every bubble you get quite a few ‘but this time it’s different’ articles and this one falls right into that ignoble tradition.

    • post_x_it

      Yes, quite. Last time round it was all going to be ok because we were in a new paradigm, and boom’n’bust had been abolished.

    • Chris Morriss

      Yes, I took issue with that. If it really is the case, then average income levels amongst first-time buyers are very much higher than I thought. (Enough so to make me envious).

  • HookesLaw

    You have just shut up all the usual moaning minnie suspects. I have of course been pointing out for months if not years that the private sector have been paying off debt.
    And of course if they have been paying off debt they have been reducing their repayment outgoings. Low interest rates as well mean that mortgage payments have come down and so this too means an increase in disposable income.

    • alabenn

      You have just shut up all the usual moaning minnie suspects
      I suspect you will find that the usual suspects will not listen, if it is given any coverage that will be a first.
      But having said that why have Cameron or Osborne not made a statement on this, that would compel Sky and the BBC to cover it, especially if they attacked the previous Labour distortions.

      • telemachus

        Go ahead
        Compel the BBC and Sky
        Spain did that in the 50’s and 60’s

        • Colonel Mustard

          Not much else to say about this, have you, you creep.

    • Smithersjones2013

      Hardly you are the first comment.

    • Makroon

      David Smith in the Sunday Times, pointed this out about seven weeks ago, but the usual media clap-trap doesn’t do rational argument from facts.
      As for the “Brown regime” – you might recall that at that time, any questioning or dissent was stamped on by the most ruthless “direct methods”. Step forward Alastair Campbell, the Balls subversion and smear team and the always compliant “public service broadcaster” and it’s many Labour groupies.

  • Count Dooku

    Interesting chart. I personally think that the change at the BoE that stopped their excessive restrictions on bank’s capital levels played a part in stopping the shrinkage of credit in the economy.
    Do you have a link to Sauders’ piece?

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