Economic recovery supported by falling savings and growth in unsecured credit: could it affect older households?

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Late last year we commented on the latest Labour Market data – noting that while there were many positive signs some weaknesses remained including stagnant real income growth and persistent unemployment amongst the young and the 50s-64s. Just before the Christmas break we saw the latest release on Gross Domestic Product (GDP) confirming that the recovery is gathering pace with 0.8% growth between the second and third quarters. The Office for National Statistics (ONS) also revised up their estimates of growth over the last year (Q3 2012 to Q3 2013) to 1.9% (up from 1.5%) as household consumption was greater than previously thought.

Towards a consumption based recovery

While consumption rose in Q3 by the largest amount since 2010 all other potential drivers of growth continue to disappoint. Investment is yet to pick up and we are continuing to import more than we export meaning that net trade is actually having a negative impact on output.Figure1


Crucially, rising consumption is not being supported by growing real incomes. Consumption is 2.5% higher in Q3 this year than it was in Q3 last year, while real incomes have risen by just 0.3% (see Figure 1). Instead, consumption has been driven by growing household liabilities and a fall in the savings ratio (the proportion of household income which is saved rather than spent) (see Figure 2). The savings ratio rose significantly following the financial crisis to 8.6% but has now fallen back to 5.4%, which is below its long run average. Figure2

Figure3While this may help to boost output in the short term, there is a risk that households are taking on debts that they will not be able to afford, particularly once interest rates start to rise (and given the recent fall in headline unemployment, the Bank of England may be required to consider raising the base rate sooner than originally expected).

Is this risk likely to affect older households?

While lending secured on dwellings has remained flat since the financial crisis, unsecured lending provided by non-bank or building society lenders has been growing, helping to fuel the recovery (see Figure 3). Recent research published by the ILCUK and PFRC suggests that the older age groups have not yet been affected by this trend as they have been able to access undrawn lines of credit and rarely borrow from unconventional lenders (i.e. payday lenders amongst others). This indicates that so far at least, the older age groups have not been driving the growth in consumer credit. However, it may be the case that with the long-term unemployment rate of the 50-64s persistently high, this cohort may become increasingly vulnerable to unconventional sources of credit as they struggle to make ends meet. Taking on additional debts prior to retirement from unconventional sources where there may be less regulatory oversight, could store up significant problems for the future. We will need to watch this space carefully.

Ben Franklin

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