UK financial data points to the possibility of economic activity picking up over the course of 2024
Increased mortgage approvals and recovering savings balances paint the possibility of an improving economic outlook for 2024
Picture being painted by latest money and credit data may not be as bleak as initially suggested
Overall household propensity to save expected to weaken going forward
Lower interest rates should continue to boost mortgage demand and support house prices
Any increase in borrowing and lower propensity to save should provide a welcome boost to the UK growth outlook
The latest money and credit data released for the UK show spending patterns remained subdued over the end of 2023, households choosing to save more and spend less in a picture that very much mirrors the one already painted by December's retail sales numbers. The net flow of consumer credit in December was reported as falling to £1.2bn, some 25% lower than the average £1.6bn monthly figure seen over the preceeding six months, while total household liquid assets – essentially bank deposit accounts plus funds invested in the government’s National Savings and Investment accounts – were shown to have increased over the same month by approximately £6bn, a 20% increase on the £4.8bn average figure seen in the two years prior to the covid pandemic. Ordinarily this would represent a substantial headwind to growth. However, scratch beneath the surface and the picture looks somewhat brighter.
Although the current stock of household liquid assets in real terms does not look high compared to the past, suggesting there remains room for savings to increase further, the latest Opinion and Lifestyle survey from the Office for National Statistics shows that the share of households that do not have sufficient savings to cover an £850 ‘emergency’ has fallen from the peak 33% level seen last February to 27% now. Not only does this suggest that the perceived need to save will fall, but also that savings are becoming more evenly distributed. And this matters as poorer households typically have a higher propensity to spend their incomes/lower propensity to save, than do wealthier households. Accordingly, as wages continue to grow in real terms, more of these lower income households could choose to spend this income rather than opt to save it, in turn providing a boost to growth.
Alongside this spending boost, the lower interest rates expected this year should also encourage households to borrow more. The anticipation of lower rates is already seeing mortgage rates fall, a move that is showing up in the latest gross mortgage figures, which showed lending rising from £16.4bn in November to £17.1bn in December. Although this figure is less than the average £19.2bn monthly figure seen over 2023, the key point is the recovery in borrowing this is suggesting, and which should gather momentum as official interest rates are actually cut this year.
This renewed appetite for mortgage borrowing is also starting to boost house prices, with the latest house price numbers released by the Nationwide building society showing seasonally adjusted house prices rising by 0.7% in January, with the annual rate of growth rising to -0.2% from -1.8% in December; clearly this increase in mortgage demand is already boosting housing demand. Separately, the Residential Market Survey for December, produced by the Chartered Institute of Chartered Surveyors, showed expectations of both housing sales and house prices rising, tallying with the improving picture painted by the Nationwide.
On the downside, the January GfK consumer confidence survey showed continued reticence on the part of consumers to commit to major purchases, the headline index remaining in negative territory at -19 despite improving for three consecutive months. However, the national psyche in the UK is for house ownership to typically be seen as a right of passage as much as anything else, meaning that while buyers may not be willing to over extend themselves to purchase big ticket items such as a new car, for example, they are more likely to remain willing to stretch finances in order to fund a house purchase.
So what does all this mean? Clearly the situation at end-2023 was difficult, with consumption subdued as households continued to prioritise building savings and paying down debt. However, the suggestion is that a nadir has been crossed, with the expectation of interest rate cuts being delivered this year already boosting activity in the housing market. Combine this with a robust labour market and wages that are now growing in real terms as inflationary pressures recede, and the foundations for a boost to consumer spending being seen are in place. Given the current febrile state of UK economic activity, this modest boost to spending could be sufficient to ensure that the recession widely expected to be confirmed for H2 2023 is both shallow and short-lived, with growth gently accelerating as we move through 2024.