What are we to make of the current performance and future prospects for the British economy and for the JAM (Just About Managing) households which the Conservative government proclaims to be trying to help?
According to recent figures from the Office for National Statistics (ONS), households, on average, became net borrowers in 2017 for the first time since records began in 1987. The savings ratio fell to its lowest annual level since 1963.
Household spending growth also fell to 1.7%, the lowest since 2011.
There was some better news on the current account deficit for 2017, which fell to 4.1% of GDP, also the lowest figure since 2011. And in the fourth quarter of last year, it fell to 3.6%. The improvement is at least partly down to the weakness of the pound and a stronger world economy boosting net exports and net earnings on foreign investments.
But the improvement in the current account is also being flattered by weaker growth in imports due to their higher cost reducing real household income and consumption growth. In an open economy, part of household income is inevitably spent on imported goods and services. A fall in the current account deficit can come from a reduced demand leakage into imports as well as increased growth in exports.
With the weaker pound and higher inflation reducing real household income, and interest rates still at very low levels, households are taking the opportunity to add to their already substantial levels of debt, rather than reduce consumption even further.
With the household sector spending more than its income, it is adding to the growth of aggregate demand, as credit acts as a net injection of purchasing power into the economy.
But with household debt already high, interest rates set to rise gradually, and real wage growth still negative, these trends will prove unsustainable. Although inflation has perhaps peaked, and real wages should start to grow once again, there is some way to go before the JAMs start to see a sustained and substantial rise in living standards. Continue reading