British households are repaying record amounts of mortgage debt, sharply reversing the trend that saw many consumers using their homes as "cash machines" to fund spending. The turnaround reflects depressed household confidence and the diminished value of housing.
The Bank of England said yesterday that households paid off a net £8bn of mortgage debt in the last quarter of last year, the equivalent of 3.3 per cent of their post-tax incomes. Some £5.9bn was paid off in the third quarter of last year. However, as recently as 2006 some £13bn was being withdrawn every quarter, the equivalent of about 6 per cent of disposable incomes. Some of these funds represented a normal flow of money into funding retirement incomes, but a good deal was simply spent.
Simon Rubinsohn, chief economist at the Royal Institute of Chartered Surveyors, said: "The constraint on household borrowing from the loss in value of residential property contributed in no small way to the 1 per cent decline in consumer spending in the fourth quarter. The likelihood is that despite tentative signs of a stabilising in activity in the residential market, homeowners will find it difficult to resume extracting equity from property for the foreseeable future. This will provide a further obstacle to a recovery."
Taking last week's sharp rise in the savings ratio, from minus 1 per cent to plus 4.8 per cent, the evidence suggests that British households are not yet ready to respond to official encouragement from measures such as the VAT cut and invade the shops.
Charles Wasdell, head of research at Propertyfinder.com, added: "In the early 2000s many people treated their home like a cash machine, withdrawing over £300bn between 2000 and 2007. We can look forward to much greater stability in the housing market in future as people once again come to view their home primarily as a place to live and less as a licence to print money."
However, prospects for manufacturing seem to have at last improved, according to the latest survey of sentiment among managers in the sector. The Chartered Institute of Purchasing and Supply (Cips) registered a significant upswing in business confidence in March, albeit from historically low levels, and the reading was better than market expectations. The headline index figure jumped to a five-month high of 39.1 in March from 34.9 in February, with improvements in the outlook for employment, output, orders and exports orders (a reading of 50 represents a neutral outlook, and below that negative).
There was also welcome evidence that the "inventory recession" or "Honda effect" could be wearing off. Traditionally output falls off much faster in a recession than demand as shops sell from stock in response to reduced consumer demand and cut factory orders more radically, until stocks once again come into balance with demand. The Cips says that stocks of finished goods fell to the lowest level since the institute's data series began in 1992.
Many official bodies, notably the Bank of England's Monetary Policy Committee, treat the Cips surveys as reliable leading indicators of future developments in the economy, and the relatively upbeat mood in the most recent poll will reinforce the Bank's belief that the range of measures taken so far—bank recapitalisations, interest rates cuts, quantitative easing and a fiscal boost of £20bn in the pre-Budget report—may begin to bear fruit in coming months, particularly through the depreciation of sterling. That, in turn, would suggest less need for a further fiscal boost in the Budget on 22 April.
The profitability of UK companies outside the North Sea oil sector also improved in the fourth quarter of 2008, says the Office for National Statistics, with manufacturing firms boosting their rate of return from 4.3 per cent to 8.5 per cent, quarter on quarter.
However, some voices were still urging caution. Howard Archer of Global Insight said: "It is important not to read too much into this one survey—particularly as it follows an extremely weak CBI industrial trends survey. It still points to sharply contracting activity and orders are continuing to fall, albeit at a reduced rate. There are signs in the survey that the weaker pound is helping exporters, but this will continue to be countered by weakened demand in key export markets."