The key chart
The key message
The OBR provided more details behind their latest forecasts for the UK economy this week, including a “sectoral net lending” perspective. The message remains the same, however (or even slightly worse).
Their starting point was an unattractive one. Their end point – an unsustainable world of prolonged, twin domestic deficits counterbalanced by significant current account deficits (ie, RoW surpluses) – is no better.
The good news for Jeremy Hunt, the Chancellor of the Exchequer, is that the net financial deficit of the UK public sector is forecast to fall sharply and to trend at c2-3% of GDP throughout their forecast period.
The bad news for UK households is that their net financial position is forecast to fall from its recent (and typical) surplus to sustained deficits of between 0.1% and 0.4% GDP. In short, the UK is set to become a nation of non-savers with households also spending more of their income on servicing their debt.
The lack of appropriate health warnings and the implied structural shift in risk away from the public sector to the private sector here reflects either flaws in macro thinking and policy-making and/or the heavy hand of reverse engineering. Neither are good news.
Appropriate health warnings
The OBR provided more details behind its latest economic forecasts this week (24 November 2022). This includes a “sectoral net lending” perspective (see chart below), an important framework that links all domestic economic sectors with each other and with the RoW (and represents a core element of CMMP Analysis).
Recall that the three core sectors in a given economy – the private, public and RoW sectors – can be treated as having income and savings flows over a given period. If a sector spends less than it earns it creates a budget surplus. Conversely, if it spends more that it earns it creates a budget deficit. A surplus represents a flow of savings that leads to an accumulation of financial assets while a deficit reduces net wealth. If a sector is running a deficit it must either reduce its stock of financial assets or it must issue more IOUs to offset the deficit. If the sector runs out of accumulated financial assets, it has no choice other than to increase its indebtedness over the period it is running the deficit. In contrast, a sector that runs a budget surplus will be accumulating net financial assets. This surplus will take the form of financial claims on at least one other sector.
(Source: OBR; CMMP)
The good news for Jeremy Hunt, the Chancellor of the Exchequer, is that the net financial deficit of the UK public sector is forecast to fall from its COVID-19 peak of £123bn (26% GDP) in 2Q20 to a deficit of £59bn (9% GDP) at the end of 4Q22. Beyond that the OBR expects the net financial deficit to trend at around £20bn (2-3% GDP) for the rest of the forecast period (see chart above, note reverse scale!).
The bad news for UK households is that their net financial position is forecast to fall from a record surplus of £86bn (18% GDP) in 2Q20 to a deficit of £7bn (-1.2% GDP) at the end of 3Q22. Beyond that, the OBR forecasts sustained HH deficits of between £2-3bn (-0.1% to -0,4% GDP) for the rest of the forecast period (see chart above).
As above, if a sector is running a deficit it must either reduce its stock of financial assets or it must issue more IOUs to offset the deficit ie, borrow more.
As noted before, the OBR assumes that the UK will become a nation of non-savers. or nearly non-savers, throughout their forecast period.They forecast that the savings ratio will fall from its “very high lockdown-induced peak” of 24% in mid-2020 to a low of zero per cent in 2023 (see chart above). Beyond that, they assume that the savings ratio will settle “at around half a per cent from 2025 onwards.” This will allow some HHs to cushion the impact of inflation on consumption but will also result in higher levels of financial inequality (see “Financial inequality and debt vulnerability”).
The OBR’s forecasts also highlight rising debt servicing risks for the household sector. The debt servicing cost is forecast to rise from £60bn at the end of 4Q22 (3.8% of disposable income) to £107bn at the end of 4Q23 (6.6% of disposable income) and £125bn at the end of 4Q24 (7.5% of disposable income). Beyond that, the debt service ratio is assumed to stabilise at around 7.5% of disposable income below the 9.7% level seen at the time of the GFC (see chart above).
Conclusion
To return to an enduring CMMP analysis theme – the lack of appropriate health warnings and the implied structural shift in risk away from the public sector to the private sector here reflects either flaws in macro thinking and policy-making and/or a heavy hand of reverse engineering. Neither are good news.
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.