Expert View: Delinquent consumers have me eating humble pie

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The Independent Online

Experience has taught me that you need two things to be a professional economist; an ability to know when to give up on a view, and, linked to that, an ability to eat large quantities of humble pie.

Experience has taught me that you need two things to be a professional economist; an ability to know when to give up on a view, and, linked to that, an ability to eat large quantities of humble pie.

You see, the economy has a habit of jumping up and biting you on the nose just when you think it is dead and buried. The reverse is also true. Indeed, this could be the situation in which I now find myself.

Far from showing the signs of recovery that I predicted when I last wrote in this paper, the latest activity data has all been rather weak. A host of gloomy commentators has been highlighting these numbers and telling us that the only way to prevent an economic collapse is for the Monetary Policy Committee to cut interest rates

So, is it time for me to tuck into some humble pie? Maybe. There is no getting away from it, some of the recent numbers have been poor. Consumer credit growth has slowed, and the level of delinquencies on credit card repayments has risen. So news on the consumer side of the economy has been pretty bad.

It is also easy to find plausible explanations for this. Surveys reveal, for example, that concern about unemployment has been relatively high compared to previous rate-hiking cycles.

Surveys also suggest that spending may remain weak for some time. A near-record number of households are planning to save more over the next year while spending less on big ticket items. This clearly does not support consumption.

And it's not just on the consumer side that the numbers have been weak; the latest survey of manufacturing shows that activity in the sector unexpectedly weakened in May.

Put all this together and it must mean that I was wrong to suggest activity would improve and that the next move in interest rates would be up rather than down. Right? Well, perhaps not, because, while growth in consumer credit has weakened, growth in net mortgage lending has picked up again. More importantly, mortgage approvals are on a clear upward path.

That's important because approvals have a strong relationship with the future level of house price inflation. Indeed, the latest approvals numbers suggest house price inflation will soon pick up quite sharply. If that's right, then the strong relationship between the housing market and the high street suggests sales volumes could soon be growing at a higher rate.

But what about the intention to pull back on major purchases and increase saving over the next year? Won't that offset mortgage approvals? Well, the important thing to realise about these intentions is that they don't have a particularly good relationship with outturns. This is especially true for saving. Indeed, there is almost a perfect negative correlation between respondents saving intentions and the change in the saving ratio.

Somewhat bizarrely, this means that the intention to save more over the next year will probably coincide with a further reduction in the saving ratio. It is not clear why this should be the case, but perhaps respondents know they are going to spend when they should be saving, but don't want to own up to it.

Put all of this together and what does it mean for interest rates? It's true the activity numbers have generally been weaker than I was expecting over the past few weeks. And the news from our main export markets has been a little more mixed than I had factored in.

Together, that has to mean I'm getting closer to saying the next move in interest rates will be down, rather than up. But while questions remain over the quality of the signals that are being provided by the numbers, I still think it is too early to make that move.

David Hillier is chief UK economist, Barclays Capital

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