Multiple Cashflow Shocks - Can UK Households Cope

LV Longview Economics
Investments. Trades. Macro.
Global Macro Report, 24th March 2022

Written by: Chris Watling, CEO & Chief Market Strategist
Thomas Ryan, Economics and Markets Analyst
Multiple Cashflow Shocks: Can UK

Households Cope?
Summary Extract:
“…All of which illustrates the resilience of consumer spending in the UK,
especially whilst monetary policy remains loose.
…In conclusion, high household savings ratios (especially when adjusted to

reflect cashflows more accurately), cash cushions and borrowing capacity
should be sufficient for the UK consumer to weather the current price shocks…”
Table of Contents
1. Summary & Conclusion p. 2 – 3

2. UK Household Cash & Cashflow: How Strong Is It? p. 4 – 7
3. Appendix 1: Assessing the Size of Price Shocks p. 8 – 10
4. Appendix 2: UK Householders’ Fuel Costs p. 11 – 12
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Multiple Cashflow Shocks: Can UK

Households Cope?
Chris Watling, CEO & Chief Market Strategist, Longview Economics
Thomas Ryan, Economics and Markets Analyst
Email: research@longvieweconomics.com
Overview
Recession concerns are front and centre and, indeed, top of many investors’
worry lists. That’s especially true for those economies which are close to the
conflict (geographically) and impacted by the recent spike in energy prices. Last
week we examined the recession case for the Eurozone (see Global Macro Report,
February 2022: “Can Eurozone Households Absorb an Energy Shock?”). Below we examine
the outlook for the UK economy and assess the significance of the UK
Chancellor’s latest government support measures.
Summary & Conclusion
UK consumers are facing multiple price shocks including: i) a rise in national

insurance tax (from April this year, albeit in part mitigated by the Chancellor’s
announcements yesterday); ii) rising mortgage costs; iii) higher petrol and
other transportation prices; iv) higher electricity prices; & v) higher food prices
(see table 1 in appendix 1 for full analysis of those costs).
Fig 1: UK workers’ real average income growth (Y-o-Y %)

2
In aggregate we estimate that those shocks will drain between £45bn and
£50bn from UK household cashflows in 2022. The key question is, therefore,
whether households have enough spare cash and cashflow to absorb those extra
costs.
Indeed, those high prices (& high overall inflation) have already pushed real
incomes into negative territory. Fig 1 above shows the average earnings for
various data series (adjusted for headline inflation). Reflecting that hit to real
incomes, confidence has also been knocked, such that headline consumer
confidence indices are now at levels consistent with prior UK recessions (fig 1a).
Fig 1a: UK consumer confidence – headline index (shown with UK recessions)
As prior periods of UK real income shocks demonstrate, though, that alone is

not sufficient to generate a recession. Post the BREXIT vote, for example,
despite widespread expectation of a consumer led recession, the UK consumer
remained resilient even though real income growth was negative. Post the
global financial crisis (GFC), during the years of austerity, the outcome was the
same (i.e. a resilient consumer). Added to that, consumers’ confidence was also
at low levels in those initial ‘post GFC’ austerity years.
All of which illustrates the resilience of consumer spending in the UK, especially
whilst monetary policy remains loose.
In the analysis below we outline the size of the UK householders’ cash and
cashflow cushion (plus balance sheet borrowing capacity). In conclusion, (still
reasonably) high household savings ratios (especially when adjusted to reflect
cashflows more accurately), cash cushions and borrowing capacity should be
sufficient for the UK consumer to weather the current price shocks.
3
UK Household Cash & Cashflow: How Strong Is It?
As our analysis of UK cash in bank accounts has previously illustrated (see

Global Macro Report, January 2022), we estimate that UK households hold an extra
approximate £200bn of cash in their bank accounts (over and above the
amount they would have had, if there had not been a pandemic – e.g. see fig 2b,
a measure of households’ ‘divisa money’).
Household savings ratios are also currently above average levels. The
official ‘GDP derived’ household savings ratio, for example, is at 8.3% (latest
data). Of note, though, that is Q3 data and since then monthly GDP growth has
been strong, which suggests that the savings ratio will be lower than it was at
that time. Those latest Q3 8.3% levels, though, are notably above the low level
reached at the end of economic expansions (just prior to recessions), and above
those during the post BREXIT economy (i.e. above the 3.7% ratio in 2017 – fig
2).
Fig 2: Official ‘GDP derived’ UK household savings ratio (%)
The official UK savings ratio is not, however, an accurate reflection

of the actual cashflow position of households. For example, the official
version adjusts for various factors that most households are unaware of, or
uninterested in. The revaluation upwards (or downwards) of wage earners’
pensions, for example, isn’t a factor that affects households’ day to day spending
patterns. The payment by employers of national insurance is another factor
which doesn’t change households’ spending patterns. Therefore, in order to
make the ratio a more accurate reflection of actual household cashflows we
make various adjustments to the official household savings ratio to generate the
more realistic savings ratio as laid out in fig 2a below.
4
In line with one’s intuitive expectations, this ratio dips into negative
territory just prior to recessions (or major slowdowns). Just ahead of the
early 1990s recession and the 2007 – 09 recession, for example, this ratio
turned negative. In 1999, it also went negative, just prior to that major
slowdown during the TMT bust (i.e. with the UK at that time, just skirting a
recession).
Currently, the message of this adjusted savings ratio is much more

reassuring regarding the outlook for UK consumption. As at the end of Q3,
it’s at 4.2% (fig 2a). That is close to the top end of the range at the start of a
typical economic expansion and underlines the cushion which households
retain. In GB£ equivalent, that 4.2% level equates to approx. £25bn
per quarter. That is spare cash, therefore, over and above the levels at which
this ratio signals rising recession risks (i.e. at or just below zero levels) – fig 2h.
Fig 2a: UK Household savings ratio – Longview adjusted version (as % of

GDP)1
1 Thisis an adjusted household savings ratio, designed to recreate the savings rate from the householders’ perspective
(thinking about items that they actually see/can relate to). For example, we have taken out items like “employers’ social
contribution” as households don’t see this in their cashflow (or even think about it). We have also taken out the last
adjustment in the official calculation (i.e. the ‘adjustment for changes in pension entitlements’) as most householders
don’t adjust spending on a quarter by quarter basis because of valuation changes in their pension funds.
Finally, and in addition to the spare cash in bank accounts and spare monthly
cashflow, households also retain considerable borrowing capacity (whether
straightforward consumer borrowing or secured financing through mortgage
equity withdrawal).
As fig 2c shows, UK households currently have £56 billion in outstanding credit

card balances. At its peak this was £70bn (i.e. pre pandemic). Relative to GDP
credit card balances reached 4.8% of GDP (in 2004/2005). If they returned to
5
that level in coming quarters, that would imply a further £55bn of credit card
debt. Other types of consumer credit also remain notably below prior peaks.
Households have also been tapping into/borrowing against their net housing
wealth (i.e. withdrawing their equity - known as ‘mortgage equity withdrawal
(MEW)’). MEW started picking up again last year, having been negative since
2008. Of note, in the past decade households have accrued an extra approx. £2
trillion+ of new net housing equity (i.e. approx. 1x UK GDP – fig 2d).
Fig 2b: UK Divisia2 money (£tn)
2
Divisia money is a weighted average of the growth rates of the M4 component assets. The components are weighted
according to their usefulness for making transactions, which is proxied by the user cost of holding these components.
The weights are two-period moving averages. https://www.bankofengland.co.uk/statistics/details/further-details-
sectoral-deposits-and-divisia-money-data

6
Fig 2c: UK outstanding credit card debt (£bn)
Fig 2d: UK household wealth (net of mortgage debt), GB£ trillion

7
Appendix 1: Assessing the Size of UK Householders’ Price Shocks
As highlighted above UK consumers are facing multiple price shocks. Interest

rates are rising, hitting mortgage holders (initially those with variable rate
mortgages and then increasingly those on ‘1 – 2’ year fixed rate mortgages);
national insurance is set to increase for employees on 6th April 2022; food and
petrol prices are higher and still rising; while higher electricity prices are about
to start impacting households, with further increases expected in October this
year.
In the table below, we have summarised our estimates of the increase in the cost
to households for each of those categories.
Key assumptions are as follows:
The original national insurance increase (announced September 2021, effective

April 2022) is estimated by the Treasury to cost £9bn (with ¾ of that increase
impacting calendar 2022 cashflows). Yesterday, in the Spring Statement, the
Chancellor announced an increase of the threshold for paying the tax (which
reduces that tax take by £6bn this tax year). As such the overall net cost is now
£3bn in the full tax year 2022/23.
Petrol prices are assumed to average current levels over the whole of 2022
(i.e. 165 pence per litre for unleaded petrol; & 178 pence per litre for diesel). The
history of the annual cost of petrol for households is shown below in fig 2e. The
data series tracking the petrol forecourt pump price is shown in fig 2f. We have
then taken that assumption and reduced it by the giveaway from the Chancellor
announced today. That 5p reduction in fuel duty is estimated to save the
consumer £2.5bn in 2022/23 tax year.
Food prices are rising rapidly. Food price commodity indices, for example,
are already over 20% higher year to date (having risen sharply last year).
Ukraine and Russia are major grain exporters (i.e. primarily of wheat,
accounting for 25% of the world’s wheat exports), hence food prices are likely
to remain under pressure in 2022. In our estimates for the cost of food for
householders in 2022, we have assumed a 10% pick-up on last year’s costs. UK
annual food costs in 2021 equated to £103.5bn.
Electricity costs will jump significantly when the Ofgem annual default and
prepayment tariff caps rise by 54% & 60% on 1st April 2022. The announced
tariffs are £1,971 and £2,017 respectively (up from £1,227 and £1,309). Later
in the year those caps will probably rise again (i.e. from 1st October 2022, with
the announcement likely around 1 - 2 months before).
To reflect that, we have modelled two scenarios for the cost of the second
tariff (in October). The first scenario envisages the second cap rising to £2,250
which would assume some pick-up on the current tariff rate, but a notable
softening of electricity wholesale costs relative to current prices; in the second

8
scenario the cap is revised up to £3,000 in October (NB this scenario uses
current wholesale costs to generate its projection).
We then assign the costs relative to their time period, i.e. we have taken the full
cost of Tariff I (April 2022 – October 2022) and half the cost of Tariff II
(October 2022 – March 2023). We have also factored in the £9bn worth of
government support announced to offset these rising electricity costs (including
the energy bills rebate, council tax rebate and any extra discretionary support
available).
Mortgage costs are also rising in 2022. The Bank of England has now raised
base rates by 40bps in the past few months. By the end of 2022, the Bank of
England’s base rate is expected to be 2.0% (i.e. market implied pricing).
Twenty-two percent of all mortgages are on variable rates (i.e. 22% of 13.5
million mortgages); Twenty-nine percent are on ‘1 and 2’ year fixed rates deals.
All of the variable and a significant percentage of the ‘1 and 2’ year fixed rate
deals will reprice, therefore, in 2022. We have modelled two scenarios for
mortgage costs. The first scenario sees rates peak at 1.75% by year end 2022; in
the second one rates peak at 2.25% at year end. We have assumed that 60% of
the ‘1 – 2’ year fixed rate deals re-mortgage in 2022.
Table 1 below shows the summary of all those separate price shocks. In
aggregate, the UK consumer is likely to be between £45 - 50bn out of pocket in
2022.
Spare cashflow, as highlighted in the adjusted savings ratio (fig 2a), shows a
quarterly capacity of £25bn per quarter, with which to fund that increase.
Equally the £200bn of extra cash in bank accounts will also likely be used, in
part, to fund those extra costs.

9
Table 1: Key household spending categories and 2022 estimates
Year
Key Household spending 2018 2019 2020 2021 2022
categories £bn £bn £bn £bn estimated
£bn
[£bn, Actual Figures + Longview Estimated 2022 Figures]
Mortgage Costs:
Scenario 1 (1.75% base 79.2 78.9 74.4 81.8 89.6
rate end of year)
Scenario 2 (2.25% base 79.2 78.9 74.4 81.8 90.2
rate end of year)
Electricity Costs:
Scenario 1 (£2,250 31.7 31.7 31.2 29.9 41.7
average tariff in Q4 2022)
Scenario 2 (£3000 31.7 31.7 31.2 29.9 46.5

average tariff in Q4 2022)
National Insurance (NI) 55.0 58.0 56.3 58.4 60.6

Costs (to households)
Petrol Costs 49.5 53.3 53.4 58.7 71.4

Food Costs 93.3 95.2 103.4 103.5 113.9
Totals
Scenario 1 308.7 317.1 318.7 332.2 377.2
Scenario 2 308.7 317.1 318.7 332.2 382.6
Annual increase (£bn)
Scenario 1 8.4 1.6 13.6 44.9

Scenario 2 8.4 1.6 13.6 50.4
Total costs as % of GDP
Scenario 1 14.2 14.1 14.8 14.3 14.8

Scenario 2 14.2 14.1 14.8 14.3 15.0
Source: Longview Economics, UK ONS, various

10
Appendix 2: UK Householders’ Fuel Costs
Fig 2e: Annual cost of fuel for UK households (£bn)
Fig 2f: Cost of UK fuel at the pump (pence per litre)

11
Fig 2g: Annual cost of food for UK households (£bn)
Fig 2h: UK household savings ratio – Longview adjusted version (absolute

£bn, quarterly data)

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Investments. Trades. Macro.

Global Macro Report, 24th March 2022