Economic surveys conceal woes of generation debt

Next week the Office for National Statistics is expected to confirm the economy shrank in the last three months of 2011. On Wednesday it will issue its last review of survey evidence for the period and what it says about the state of retailing, manufacturing, construction and the rest. It was a bad time for which the government and the eurozone crisis can share the blame. What is more in doubt is the path of the economy in the first three months of 2012. A feelgood factor has warmed right-wing political debate, with some coalition MPs claiming they have sighted green shoots of recovery. Surveys of manufacturing and services were upbeat. Two months of positive retail sales added to the impression that Britain was getting back on its feet, and the consumer was leading the charge. There was evidence during January and February that middle income consumers were refusing to pay down debt and the poorest were turning to payday loan companies in ever bigger numbers. Maybe they were spending the money on the high street. It was possible, though Bank of England lending data pointed in the opposite direction. Then it happened. A dive in the retail spending figures for February, combined with a retrospective downgrade in the spending figures for January showed that the message from the high street was mangled by the ONS. It was always wrong. The spending splurge was a mirage and while green shoots of recovery from the consumer side of the economic equation appeared real, they were a trick of the light. When they were published, the ONS figures for January didn't add up without a huge rise in borrowing. Now we know the rise in inflation, which is still high despite coming down to 3.4%, combined with ultra-low wage rises (the annual rise is running at 1.7%) and a lending clampdown continues to depress consumption. Borrowing, such as it is, can be seen in a slow decline rather than the rapid decline many economists believe is necessary to bring household debts back to manageable levels. Ben Broadbent, the Goldman Sachs economist and monetary policy committee member, took the opposite line in a speech last week. He said households can sustain higher levels of debt than previously believed because most of the equity released from the housing market had gone into savings and the net position was little changed from the early 1990s. With households no more leveraged than two decades ago, they are freer to spend than many think. This argument mentions, but ultimately ignores, the fact that most of the benefits of housing have been hoarded by older households, and bigger mortgages have been taken on by young families. Young families are the lifeblood of the economy and they remain up to their necks in debt. Broadbent is giving evidence to the House of Lords next week, but is in danger of giving a distorted impression of the consumer with a broad brush aggregate view of macroeconomic trends. The budget did nothing to help young families. The Insitute for Fiscal Studies said it did the opposite and punished them more than any other group. With tax credit and housing benefit cuts to come this year and next, familes are likely to carry on delaying big ticket purchases and spending will remain subdued. If they do borrow to spend, as Broadbent argues they can, it just perpetuates Britain's game of debt-fuelled consumption.