Just in time for summer UK consumer confidence booms as GDP is revised higher

Today sees the UK economy at least make an effort to nudge past one or two of the headlines about Greece! One thing London at least has is temperatures which are expected today to be Athens like, or in tabloid terms to be hot,hot,hot with the temperature at the tennis at Wimbledon expected to make 30 degrees Celsius. We do not cope with it particularly well and I think I will give the tube a miss as I am not a great fan of saunas. However already we have received an update on consumer confidence which ties in with the weather. From the Gfk Consumer Confidence Report.

We’re seeing a dramatic uptick in confidence this month, a real post-election bounce that’s put a spring in the step of consumers across the UK. June’s six-point jump takes the Overall Index Score back to levels not seen since the late Nineties or early days of the Noughties.

If you look for some perspective you will see that like so many measures this index picked up after the Bank of England Funding for (Mortgage) Lending Scheme began in the summer of 2012. The chart provided shows that it hit a low of around -30 as summer turned to autumn in 2012 compared to +7 now. So the UK consumer has followed mortgage and housing changes just like one of Pavlov’s Dogs and “same as it ever was” to quote Talking Heads. The catch which will wipe the smile of the face of the more thoughtful Bank of England policy-makers is that back when consumer confidence was last at this level UK Base Rates were more like 5% than 0.5%.

Or as the Chief Economist of the Bank of England Andy Haldane put it in a speech yesterday.

Interest rates appear to be lower than at any time in the past 5000 years.

I will leave the Bank of England to explain how record  low interest-rates go with a consumer boom that may well be as hot as the weather if Gfk are correct.

Perhaps Andy and his colleagues are troubled by this issue.

Over the course of a decade, the risk of experiencing at least one recession rises steadily, reaching between 85-90% after ten years.  Using post-war data, this cumulative probability is just less than 80%.

One is starting to become due is it not? If we look for possible causes there is Greece in all the headlines or deeper in the newspapers but overall more significant the way that China seems to be bubbling over.

Of savings and generational inequality

One (Space) Oddity of the Gfk report is that the savings index has improved too and it is apparently now a good time to save! Rather awkward that as that does not go well either with it being a good time to consume nor following the FLS inspired reductions in savings deposit rates. But this does link in with an interesting set of data on my theme of generational inequality from the Office for National Statistics.

The median disposable income of retired households was 7.3% (£1,400) higher in 2013/14 than in 2007/08, after accounting for inflation and household composition, compared with 5.5% (£1,600) lower for non-retired households.

So retired households who one might think are dependent on savings income and deposit rates both of which have fallen have in fact done relatively well in the credit crunch era. We have considered this many times before but if we add in higher house prices and indeed rents it is not the best of times to be young is it? Or to be more specific for the first time for a while subsequent generations face the probability of being worse-off than their antecedents.

Whilst I expected the changes to the state pension to be an influence here I have to confess some surprise at the other impact below.

In 2013/14, retired households received an average of £9,500 from private pensions/annuities, a real terms increase of 9% from 2012/13 when the average was £8,800 and an increase of 26% since 2007/08 (£7,500).

Going forwards with the legal changes that is going to be difficult to measure to say the least.

What about booming consumption?

Also whilst the data only takes us up to April 2014 there is plenty of food for thought in the numbers below.

In 2013/14, median disposable income was £500 (or 2.0%) lower than in 2007/08, while GDP per person in 2013/14 was 3.1% below its 2007/08 level.

Indeed the OECD (Organisation for Economic Co-operation and Development) weighed in on this subject yesterday evening. It compared hourly wage growth pre credit crunch (2000-07) to after it (2007-14) and had the UK as 5th worst at just under -4%. Until their full report is published the methodology used is unclear but we are not that different to Greece on this measure.

Those numbers do not fit that well with booming consumption but of course we have just had a good year in economic growth terms to add into the pot.

Between Quarter 1 2014 and Quarter 1 2015, GDP in volume terms increased by 2.9%, revised up 0.5 percentage points from the previously published estimate.

GDP was estimated to have increased by 3.0% in 2014, compared with 2013, revised up 0.2 percentage points from the previously published estimate.

But even allowing for that we again find ourselves in the position of looking at things which do not seem to be consistent. Perhaps the unsecured lending boom squares much of this circle.

Consumer credit increased by £1.0 billion in May, in line with the average monthly increase over the previous six months. The three-month annualised and twelve-month growth rates were 8.5% and 7.2% respectively.

There was a time when this would be considered a risk of “over-heating” and interest-rates would rise in response as opposed to being unchanged for over 6 years at a 5000 year low.

Also we may be feeling better-off due to this.

Real household  disposable income per head increased 3.9% in Q1 2015 compared to the same quarter a year ago

Oh and on the subject of interest-rates Andy Haldane might like to review and perhaps redact this bit.

in my time at the Bank of England I can recall UK interest rates rising by 5 percentage points in a day.

Actually in 1992 the latter 2% never actually happened as it was announced for the next day and was cancelled.

The unreliability of GDP statistics

I often detail the problems of using Gross Domestic Product as a measuring-stick for an economy. Today’s data release highlights that in one simple section and it refers to the construction sector update that I discussed on the 12th of this month.

Construction output rose by 4.5% between Quarter 1 2014 and Quarter 1 2015, revised up 4.8 percentage points from the previously published estimate.

The construction series was a shambles and hopefully has now been improved. If we recall the shambles over recording rents and then the establishment effort to force us to use them as an (owner-occupied) inflation measure you can see that the housing sector is measured dreadfully. It is a good job it is not a significant part of the UK economy…..Oh hang on.


There is much to consider in the latest data. We should be grateful that the UK continues to grow and that the performance over the past year of circa 3% is good in historical terms. However even if we ignore the conceptual issues with GDP we have the problem that if we move from the aggregate to the individual level things are not as good. For example I have already highlighted the lagging of per capita GDP well even now it continues to lag the aggregate number.

GDP per head was estimated to have increased by 0.2% between Quarter 4 2014 and Quarter 1 2015, revised up 0.1 percentage points from the previously published estimate. Between 2013 and 2014, GDP per head increased by 2.3%.

As for generational issues they continue to build as the young face student debt,maybe mortgage debt on large scales whilst wages and incomes stagnate. Perhaps this is why Andy Haldane is so gloomy.

The psychological scars of the Great Recession, as after the Great Depression, have proved lasting and durable.  They help explain the sluggishness of the recovery, and the adhesiveness of interest rates, since the crisis.  And, if the past is any guide, these scars may heal only slowly.

His policy prescription? Well we do get a broad steer.

As then, they suggest the optimal path for interest rates involves an immediate cut in rates for about a year, which pushes inflation back to target and closes the output gap.

Meanwhile enjoy your extra second tonight!


14 thoughts on “Just in time for summer UK consumer confidence booms as GDP is revised higher

    • Hi Shaun and hi Pavlaki.

      I would guess that Andy Haldane has been reading his Graeber, which is handy as it’s just about time to prepare for another 5000 years of debt. (Especially if you’re a UK student who aspires to ever buying their own home.)

  1. Hi Shaun,

    Another great article with some very useful 2008-9 historical comparisons.

    My immediate thought was what would growth look like if a more realistic inflation rate was used like RPI or a real BOE horror of RPIH with realistic housing inflation. I suspect everything would not look so rosy and it would do much to explain the lack of wage growth and that most are still worse off since 2008. Certainly most of the self-employed or who own SMEs that I know have still not reached or surpassed their 2008 levels of turnover and income.

    A recent discovery I made on lack of wage growth was through talking to my brother who owns and runs a shop. He offered the person he employs a pay rise and being an honest lad, he told him not to bother as any increase would just reduce his working and child tax credits, so he was no better off. This suggest the comments made by the current Government about employers getting low wage earners on the cheap is spot on and this is an area that needs urgent reform, so higher wages result in higher take home pay and a reduced tax burden for those who don’t get tax subsidies and also helping to reduce the UK deficit!

    • Hi Rods

      The issue of high marginal tax rates at lower levels of income or the “poverty trap” has been helped by the raising of the Personal Allowance (tax-free income) but has by no means gone away, as your brother has discovered. The tax credit system has subsidised low pay but it will be something of a devil of a job exiting it.

      As to UK economic growth I can help with the numbers if RPI replaced CPI. Just before Christmas Dr.Mark Courtney gave a talk at the RSS where he estimated that it was the equivalent of 0.5% in GDP terms or 3% becomes 2.5%. No wonder they changed it!

  2. Hi Shaun.

    I have seen a figure of €110 million mentioned as an estimated cost of conducting the Greek referendum. Bearing in mind that this is the fragrant Ms Lagarde and her cronies we’re talking about, do we have to double this if the Greek people give the wrong response the first time?

    • Hi Jim M

      Or treble it if they have the temerity to vote “incorrectly” twice?!

      This morning there are some odd things as ever circulating. There has been one opinion poll so far with no in the lead. BBC Radio 4 Today puts it like this.

      “Greece: no vote still in lead but falling fast according to polls”

      As there has only apparently been one poll that is an odd thing to report.

  3. “Or to be more specific for the first time for a while subsequent generations face the probability of being worse-off than their antecedents.” – more “same as it ever was” Shaun, if even that.

    My first house in 1987 cost me 2.75 times my salary and consumed 25% of my salary in mortgage repayments. 2 years (and a near doubling of interest rates) later the house had risen in value to the extent it then cost 4 times my salary and (because I was paying a mortgage at 2.75 my 1987 salary) consumed 50% of my salary.

    The same house today would cost me 4.3 times my 1987 salary adjusted for “pay rises”, more of which later, but, the mortgage repayments would consume 28% of my salary.

    I can do direct comparisons because I worked in the civil service in 1987, subsequently leaving, but still have friends there who provided me with the current pay scales for my the grade I held in 1987, so an argument about “pay not keeping pace with inflation”, whilst true, doesn’t wash because I am comparing like grade with like grade and Public Sector pay collapsed by 20% since 2007.

    I do tire of these “the young have never had it so hard” lines – you’re right, they haven’t cos anyone young with a new mortgage in the late 80’s had it a sight harder – that’s why there were 700000 repossessions a year at the time.

    OH, and when I applied for my mortgage in 1987, the Building Society checked my declared salary and whether I was under any discipinary/inefficiency action with my employer and they wanted to know about any other loans or financial commitments I had – sound familiar?? Just for good measure, despite finding no problems with the house they would only give me a 60% mortgage leaving me to fund the other 40%, although they offered an 80% mortgage at an even higher interest rate with an extra premium attached by way of insurance for the first 20% of the value of the mortgage if I defaulted – NOW THAT’s WHAT I CALL HARD!

  4. Diatribe over, I think another contribution to increased consumption is increased aggregate employment as the size of the work force has actually grown in recent years so you need to employ more people now in order to maintain the same employment rate as a few years ago. In such a situation you cab manage to pay steadily falling real wages whilst increasing consumption and GDP – a quantative but qualityless growth model.

    • Hi Noo2

      i agree why is why I looked at GDP per capita and real disposable income. As to your points there were indeed issues in the 1980s as for example the 1980-82 recession which hit my fathers business (plastering sub-contracting) hard and he only survived as the bank withdrew loans because they forgot an overdraft they had given him which he ran-up to the maximum. But this time around has the feeling that troubles will be around for longer as we recovered from things then whereas no have we?

      Also adding to the problems for the younger generation in many cases is/are student loans.

      • Sorry Shaun, student loans were there in 1987 although not as big as today and I never went to University/Polytechnic. College was as far as I got and I had to fund myself through that as there were no grants for college education. As I didn’t go to Uni, I didn’t have student loans to deal with but then again, the young of today don’t “have” to go to University.

        I never had the feeling that things recovered in my part of the country (North West). It was more a long slow decline commencing in the early 70’s, although a recovery did manifest in the mid 90’s with a vengeance so, a 20 odd year depression is a very long one as the “recovery” of the 80’s passed us by in the North West. I maintain that this time round the young may be experiencing hardships approaching those experienced by my generation in the North West but they haven’t managed to match our hardships yet.

      • One other thing, I know what your father went through as I was a trainee quantity surveyor with a buildingfirm in the early 80’s and tyhey almost went biust. I was laid off and with no other jobs available other than public sector I was forced into the civil service.

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