The Consumer Outlook
Real wages (average earnings growth minus retail price inflation) have now fallen for 17 months in the UK.
The OBR expects this to continue throughout 2011 and 2012 and into 2013. And yet they believe consumption will grow in excess of real household disposable income.
As I’ve explained before, this forecast is driven by a falling household savings ratio. In other words the government expect households to borrow to maintain their consumption.
And as I’ve pointed out, despite all the talk of exports and investment – the OBR still expects the consumer to play a crucial role as a driver of economic growth.
The problem is there is very little evidence that cautious households are prepared to borrow – something made very clear by the chart below taken from Bank of England data.
If household’s debt appetite remains subdued and real wages continue to fall – how exactly is consumption expected to grow?
Against this background it is unsurprising that Sainsbury’s CEO Justin King has today described the retail environment as ‘tough’ and noted that ‘higher fuel costs and the government’s austerity measures were eating into household budgets, forcing many customers to trade down to Sainsbury’s cheaper, own-label “Basics” range’. ‘
If we were looking at a global rebalancing scenario in which exchange rates adjust, we experience deterioriating terms of trade (I maintain this is what Mervyn had in mind when he referred to the inevitability of lowler incomes) and start having to produce more domestically, at higher cost, rather than importing – isn’t this what it would look like? Falling consumption, lower incomes.
my guess is that you are right and OBR is wrong – housholds will not borrow more, at least not until after the economy recovers. Borrowing won’t cause recovery.
And since real wages are falling presumably this mean the debts people already have are in relative terms getting bigger.
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I followed your earlier links to the OBR pages which showed higher debt. I found no explanation for it. Is there one on offer? They’re modeling, which means there are assumptions and those must exist. Is it something as bluntly stupid as consumption being assumed as returning to trend and that driving debt as the dependent variable? It makes no sense.
Isn’t it a result of their projection of the budget deficit decreasing? If you’re determined to forecast a decrease there, then your constraint is the structure of the national accounts – the famous Wynne Godley sectoral balances arithmetic. So unless you forecast an export boom, then the only thing that can give is the private sector balance. And presumably they have a way of disaggregating the private sector convincingly: the corporate sector takes up so much of the slack and households the rest.
So it’s an artifact of their required GDP growth number and their required budget balance shift. As Duncan and LE say, it’s unlikely to happen. Either growth will disappoint, or the deficit will stay higher than desired. This is precisely the point martin Wolf was making ad nauseum last summer.
So in your analysis, we’re stuck? Osborne’s policies aren’t going to result in growth, but There Is No Alternative, because of the bond markets…
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