The Bank of England voted against raising interest rates earlier this month in light of disappointing wage growth figures and falling inflation. With household earnings at a standstill, a raise in rates could have disastrous effects on borrowers.
Record low interest rates, spiralling household debt and stagnating wages have defined this recovery from the 2008 financial crash. While Conservative and Liberal Democrat ministers have been able to boast of a successful recovery through growing GDP figures, the government narrative is criticised for ignoring the structural faults in the UK’s economy. The most glaring of these faults, as admitted by the Bank of England governor Mark Carney, is found in our housing market – which is already starting to show the warning signs present in the decade running up to the financial crisis.
With house prices rising at their fastest pace since 2007, there is growing concern that another asset bubble could be forming in the market. As well as the possibility of another ‘burst’ bubble, the fact that house prices are outpacing wages mean that mortgages are becoming unaffordable for a growing number of families. Those that already have mortgages are now struggling to keep up on payments as real wages stagnate (or in some cases fall). The knock-on social effects such as falling living standards and food poverty mean that the government’s optimist rhetoric about the economy seems increasingly out of touch. Politically, there needs to be a recognition that there are measures of economic success other than GDP, such as wage growth, living standards and the overall ‘activity’ within the economy.
Can the government honestly say that our economy has been cured of the ills leading up to the financial crisis?
The short answer is no. Recent figures that show record-high house price rises and growth in the financial sector suggest that the same forces that caused the crisis are now being used again to create growth in our economy. Instead of using an industrial policy to bring up both employment and wages, we are continuing to rely on the free hand of the market that offers no direction or guidance for a country heading to another crisis.
Without real growth in wages, increased consumer spending can potentially be a worrying economic sign. This is because without any extra disposable income, households need to start borrowing more to purchase more. In the worst case scenario, families are turning to payday loans – such as those offered by Wonga or Quick Quid – that come with extortionate repayment demands. Just three days ago, the Financial Ombudsman Service reported that it had been contacted by over 10,000 people with complaints or worries in regards to the expansion of payday loan companies.
A radical economic policy is needed to mend the UK economy; a policy that is focussed on raising wages and creating stable jobs with clear entry routes. We need a sustainable recovery, not one driven by asset bubbles, debt and insecure part-time employment.