Economists have been predicting a slowdown in the economy and in particular consumer spending for at least six months. They now express surprise that this is not happening. Do they live in the real world?
Preliminary figures from Credit Card Research Group put an estimate of £5.5bn on credit card spending for December 1997 – well up on the 1996 figure of £4.17bn and a 10 per cent jump on the November total of £4.96bn.
The reasons for this jump in consumer spending are obvious. First, the retailers have over-ordered and many are long on stock. Severe price cuts and early winter sales have been necessary to move surpluses.
Second, people have been moving house more, particularly in London and the South-east. Figures from the Council of Mortgage Lenders show housing loans approved during the first nine months of 1997 were up by 20 per cent on the same period of 1996, and 1996 saw a large increase on 1995 too, with a 19 per cent rise.
It is hardly surprising, therefore, that retailers report that high-value household goods and furniture have been the fastest sellers in the sales.
But the most important factor has been windfall shares – people can afford to spend. Moreover, the vast majority of families have fixed or discounted mortgages so the summer 1997 increases in the bank base rate have not had the desired effect of hitting people where it hurts.
Economists at the Treasury and Bank of England seem to have little or no insight into human behaviour. They apparently based their predictions of a fall-off in consumer spending on the fact that people did not go out and immediately spend their windfall bonus shares.
Most individuals received them far too late to pay for their 1997 holiday and it was obvious that it would not be until the New Year that families would cash in their bonus shares to pay for Christmas presents, spending at the sales and 1998 holidays.
Many of them probably have not done so yet because, as we can see from Credit Card Research Group's figures, families only spent the money in December. They will not put down the deposit on their 1998 holiday until some time in January or February. The credit card bill will not appear until March.
It seems likely that consumer spending will remain strong in the first quarter of 1998 and that inflation will rise from its current level of 3.7 per cent. This is bound to mean higher interest rates.
All of this has important implications for credit card issuers – currently engaged in a price war – as well as Treasury and Bank of England forecasters if they are to learn the lesson of the ineffectiveness of interest-rate hikes when most people have fixed-rate mortgages.
RBS Advanta has been highly successful in attracting new customers with its offer of a fixed interest rate at 7.9 per cent until January 1, 1999, as have the Co-op and newcomer Capital One, both with low initial fixed rates.
RBS reports a 27 per cent increase in credit card spending as a result of new cardholders and an increase in transactions.
For these new cardholders, any increase in bank base rate will have no effect at all.
But there are problems ahead for all card issuers. Customers are switching cards because the cost of doing so is either nil or negligible. Some card issuers, such as NatWest Access, Mastercard, GM and Barclaycard, have introduced customer loyalty schemes to discourage customers from switching although they will not deter them from having several cards from different issuers.
Long-term credit card issuers – if they want to keep their customers and/or make a profit out of them – will have to look at imposing penalties on those who leave, having enjoyed a low initial interest-rate period.
The cut-price credit card issuers have already moved to improve profitability. GM, MBNA and Goldfish have recently increased their late payment, over-limit and returned cheque fees.
The message for credit card-holders is, make hay while the sun shines – these golden days won't last.