Stable and Principled from July, 2010; we pointed out that even the not terribly independent OBR thought that the Government’s budget numbers could only be hit through a renewed surge in property prices, construction, and consumer spending. The forecasts pencilled in higher receipts from stamp duty in the financial year 2013 than were reached at the peak of the bubble in 2007, and expected that the bulk of jobs growth would come from retailing and hospitality.
In the absence of a wholly unexpected surge in wages (and that’s not going to happen), the only way the great British consumer could deliver this would of course be to take on another heap of debt. In this light, all the moralising about savings and sordid political rows about pence off this or that micro-project looks almost surreal. Perhaps they imagined that Ricardian equivalence would mean that government saving automatically implied private spending. Or perhaps hope was the plan.
It looks like their prayers may have been answered, although perhaps not in the way they might have wanted. The OBR forecasts predict a mammoth rise in household indebtedness from here to 2015. Since the crash of 2007, UK households have indeed been paying off debt at an unprecedented clip - surely just what the Tories would want? However, for the rest of the numbers to hold together, this has to go into reverse.
I’m not sure to what extent the OBR really expects this to happen - whether this forecast is meant as a prediction of the future, or as a statement of policy, an exercise in indicative planning. Because I’m finding it even harder to imagine a renewed credit boom in the next year or so than it was in July, 2010. Consumer confidence is in the toilet, stagnating at the levels of 2008(!), the cuts have hardly begun, there are ugly noises about interest rates going up, and real wages are falling. Let’s break out the VISA and have a party!
Well, even that would be out of fashion. It’s all abandoned warehouses in the East End again - even if you have the money, you’re meant to look cheap. As the Bank of England points out, demand for mortgages is falling, demand for credit card lending is flat, and demand for unsecured credit is falling. Neither the housing market nor the consumer market is borrowing.
What about businesses? The same document reports that large corporates are finding it a little easier to borrow, but small and medium-sized companies (i.e. the bulk of GDP) are seeing no improvement. And demand from small businesses has fallen sharply. That could be a seasonal effect, of course - you can well imagine retail businesses borrowing to load up with inventory before Christmas and then paying as the invoices arrive in the New Year and last year’s models are sold off at cut prices.
So it’s not just that Osborne’s plans foresee the nation’s shoppers literally maxing out their literal credit cards, rather than the government figuratively maxing out its theoretical credit card. The problem may be more serious than that - what if the cards are, as it were, declined at the till? Or rather, what if the shoppers stay at home?
It’s worth pointing out that the Bank’s credit survey is considerably more optimistic when it comes to expectations three months forward. It’s telling, though, that for the majority of the metrics it covers, there must be a total reversal of the measured trend for the expectations to be fulfilled. (Credit availability to big business, and its inverse, the default rate for loans to large companies, are about the only measures where expectations are in line with current trends.)
There is a crumb of comfort in the survey for the Government, depending on whether you think they are sincere in wanting less household debt or not. Demand for mortgages is plummeting at the moment - almost as fast as it did in the grim recession winter of 2008-2009. The first quarter always seems to be a poor one, but the drop this year was -35% compared to -23.5% the year before and -15% the year before that. More to the point, the survey for Q42010 reported a net shrinkage of -41.5%, equalled only by the savage -69% recorded in the third quarter of 2008 as banks threw themselves out of the Bank of England’s discount window. 2009 saw strong growth through the summer - 2010 saw shrinkage beginning in May and picking up pace. (What on earth can have happened in May, 2010?)
The crumb, then - while the line-items for prime lending and for “other” lending secured on housing sank, buy-to-let actually gained 6%. It’s the only form of housing investment that has actually been demanding more credit since May rather than less. Also, availability for borrowers with LTVs over 75% seems to be rising again. So the most speculative actors in the housing market are feeling confident. That’s something - if you don’t care about housing or private debt, that is.
On the other hand, the Bank concluded that the biggest factor leading banks to reduce the supply of mortgage credits was “expectations for house prices”. Tom’s point in comments back in July remains very valid indeed; if you consider the OBR’s figures to be a policy statement, the only way they can come true is Housing Bubble 2.0, in which case all the talk about the Germans and the virtue of saving can be dismissed as bullshit and the policy goal is to pump up the bubble as soon as possible. If you consider them an attempt to predict the future, though, you have to assume that HB2.0 is not very likely to happen, and draw the obvious conclusions for growth, unemployment, and not least, the budget deficit. It looks like the OBR has done just that.