Windfalls for consumers scramble grow...

Back To Home Page

LINKS

Bank of England

Windfalls for consumers scramble growth forecasts

Millions of people are due to pick up about £21-billion when seven building societies convert from being mutual associations "owned" by their savers and mortgage borrowers, to publicly quoted companies with an eighth being taken over by a listed bank. The exact numbers are not known: the maximum possible is 19-million people, but because many of them will have accounts with more than one building society the actual figure could be lower.

The handouts will mainly be in the form of free shares. Investment banker Salomon Brothers says: "The uncertainty over the impact on spending of these windfalls dwarfs the normal uncertainties over economic forecasts."

Tax free, the bonuses are equivalent to 2.8% of UK gross domestic product, 4% of a year's consumer spending or a temporary cut in the basic rate of income tax from 25% to 14%.

The biggest will come in June when the giant Halifax building society merges with its smaller Yorkshire neighbour, Leeds BS, and switches to being a powerful banking force. The 8.5-million account and mortgage holders with the pair will each get an estimated average £1 300 - a total of around £11.2-billion.

Will the building society members cash in their windfall and spend it or hold on to the investment?

Last month the Bank of England estimated that recipients would spend between 5% and 10% within 12 months, increasing total demand by 0.35%-0.45%. And it pointed out that there could be inflationary risks if the figure was higher.

One of the favourite investment games of the past few years has been spotting the next mutual society to become a listed company, starting a savings account and waiting for the bonus. So much so, in fact, that some building societies have taken steps to inhibit short-term, Johnny-come-lately speculators who opened savings accounts with small deposits.

Originally, Salomon's guesstimated that about £5-billion worth of the windfall shares would be sold and the money spent within a year which might add 1% to consumption.

However, a MORI survey of 3 685 people commissioned by Salomon Brothers indicated that only 24% of people would cash in their free investment in the short run. Another 29% would do so if the price of the shares they received rose by 20% or more, the survey showed.

Salomon's report said that "only about half the proceeds from selling the shares will be spent. The rest will be invested or used to pay off debts."

Spending intentions among the sellers were mixed. Just over half would blow the money on a holiday, 34% were looking at home improvements (a form of investment), consumer durables and cars appealed to 33% and clothing (especially among the younger segment) to 15%.

As a result of the survey Salomon's has changed its expectations and now concludes that the "upside risk to growth from the windfalls will be modest". The estimate of £5-billion being added to consumption "now represents the maximum that might occur if share prices rise sharply".

The central forecast now is that only 10%-15% (£2-3-billion) will find its way into demand for goods and services, an addition of just 0.5% or half the first assumption.

And the high priority given to holidays by those who will spend will see much of the money heading to overseas resorts and hence not add to domestic price pressures.

As a result Salomon's has downgraded growth projections for the UK economy, especially as sterling's strength - it has gained 16% since August - is clobbering exports. Any boost to the economy from the building societies could be exceeded by the weakening competitiveness of British goods. So against consensus forecasts of GDP growth of 3.4%, Salomon feels "3% or slightly lower may be more realistic". This is unlikely to put pressure on prices, while imports will be cheaper if the pound holds its level and inflation could be kept at 2.5%.

Top of page