Rebalancing away from debt-driven consumption means a long and slow recovery for the UK
Bank of England data released yesterday shows total net lending to individuals rising by £1.3 billion in May compared with April. However, this is far below the average monthly increase of £8.7 billion seen for the years 2000-2007. Hence, access to credit remains considerably tighter than prior to the recession.
With respect to the property market in particular, the number of loan approvals for house purchases was 45,940 in May - slightly down from the previous six-month average of 45,957 and less than half typical pre-recession levels. With mortgage approvals so low and yet to show any sign of rising, this points towards a fragile property market for the remainder of 2011. We continue to expect average house prices for the year as a whole to be down on 2010 levels.
Between 2000 and 2007, the UK economy was propped up by consumer debt, with households borrowing ever increasing amounts to either improve or maintain their standards of living. Now, a combination of fiscal austerity and constrained bank lending present a major headwind to consumer spending growth.
While this means challenging times for the UK economy in the short-term - particularly this year - this is also part of a necessary rebalancing towards growth which is driven by investment and exports rather than unsustainable consumption by government and consumers.
Ultimately, this rebalancing means a very difficult few years ahead for UK households. In 2011, we are right in the middle of this process, and this is reflected in some of the grim announcements from the consumer-dependent retail sector of late; yesterday, chocolate manufacturer Thorntons said that it would be shutting at least 120 of its shops, while Carpetright has announced the closure of up to 50 shops following a 70% fall in its annual pre-tax profits. Squeezed incomes and tight lending are leading to pain on the High Street.