Today there are conflicting reports in the news relating to the progress of the UK economy – on the one hand we have the Institute for Fiscal Studies’ Autumn statement predicting that the austerity measures could continue until 2018, but in contrast the British Banking Association have reported an increase in mortgage lending.
In anticipation of the Mr Osborne’s Autumn statement due to be made on the 5th of December the IFS analysis produces two possible scenarios – either the recent down turn in growth and increase in borrowing is only temporary and the chancellors targets will come into line or these are longer term problems that will persist and without some change in policy will cause austerity and the subsequent pain to continue until 2018.
The increasing concern must be that the UK economy, having gone down with other comparable economies will not recover as quickly and there are plenty of indicators that current measure are not having the right effect. There are still job losses in the pipeline as further government cuts bite and while the expansion of the private sector has appeared to keep jobless figures down at minute there are factors that might prevent this continuing. Many families are relying on part-time employment to keep solvent – but when the Universal Credit and other changes are introduced these families might well find themselves in the poverty trap where working part-time means they are not able to claim housing benefit and other relief so will be forced out of work. Also the impact of lower wages, short time and part-time working on the government tax take is likely to continue to grow along with the subsequent decrease in economic activity as families cut back on their spending.
In contrast to this the BBA saw an important change in the lending activity of High Street Banks – an increase in mortgage lending of 0.6% over the year to October 2012. The drivers for this are a rare successful financial measure by the government – the Funding for Lending Scheme, previous schemes have not had traction or appear to have been absorbed by the banks. However it appears that high street banks, particularly the Santander group are using this scheme to increase their share of the mortgage market, this along with some reduction of deposits required appears to account for the growth in which case will be a longer term trend.
The housing market accounts for only a proportion of the 7% of the UK economy made up by construction – but is a very important sector. It provides a lever into the economy through direct employment and secondary spending – as families move they make increased discretionary spending on furniture etc.. Also if the housing market moves then a least the slide in house prices might stop if not recover – this will have an impact on consumer confidence and loosen purse strings.
As you can see – it is too close to call – but I think the housing market will start to recover – but not sufficiently to make up for the lack of government spending. If so we will caught in the trap of increased government borrowing just to maintain the status quo making borrowing for investing in the infrastructure as Keynes would recommend impossible.