With unsustainable car sales, time to hit the economic brakes

The fact that growth is driven by a consumer boom highlights the unbalanced nature of our economy

Growth in car sales is normally good news – but this year’s rise is alarmingly high

Why are Britons so confident about their economic futures? We are, according to a global consumer confidence survey by Nielsen, the most confident we have ever been – or at least since the survey began in 2005, passing the previous peak under the Blair government in 2006. Consumers elsewhere are pretty upbeat too. Indeed, American and Danish consumers are even more confident than we are, while Indians top the league. Only in the eurozone does consumer confidence remain depressed, with the Italians and Greeks particularly down, as you might expect.

A survey is only a survey. You want corroboration from what people do, rather than what they say, to be sure of its findings. In the case of the UK, this has come through most strongly in the level of new car sales. Just over half the cars sold here are fleet or company purchases, so cars are not only the largest single consumer item; they also give a feeling for business confidence too. Here the story is remarkable. We have figures for the first nine months of this year and the total of cars registered was 2,096,886, up 7.1 per cent on the same period last year. We will have to see what the VW scandal does for diesel sales, but we seem to be on track to beat the previous annual record for car sales set in 2004.

If this is remarkable, it is also slightly troubling. Of course confidence is better than despair, just as growth is better than recession. But the fact that growth is driven by a consumer boom highlights the unbalanced nature of our economy, and points to difficulties ahead. I suppose the question it raises is: how do we tame the boom? Policy-makers must not undermine growth, but you can’t have car sales going up by 7 per cent forever when the economy as a whole is only growing by less than 3 per cent. Anyone who doubts this should read Ben Bernanke’s new book, The Courage to Act, in which he describes what it was like to steer the US economy through the financial crash and its aftermath. He was, as you will recall, chair of the Federal Reserve Board from 2006 to 2014, and before that a governor of the Fed and then chair of the Council of Economic Advisers. There are many chilling episodes, the most scary of all being the night in which he was among those few who tried and failed to save Lehman Brothers. “It was,” he writes, “a terrible, almost surreal, moment. We were staring into the abyss.”

However, the part of his book that is most relevant to the situation now – and this goes for Britain as much as the States – comes earlier in his narrative. For the failure of monetary policy really began in the early 2000s, from about 2003 onwards, as the boom was building and the foundations of the sub-prime crisis were laid.

Policy-makers in the Fed and elsewhere did not believe that the US housing market could collapse, bringing down the financial system with it. Here in the UK it was an over-ambitious housing lender, Northern Rock, that became the first casualty in our own banking crash. Professor Bernanke’s book highlights the muddle over US regulation of home lending, but also asks to what extent the Fed might have leant more strongly against the boom by tightening credit earlier. He actually sees this mainly as a regulatory failure rather than a monetary one, but acknowledges that they underestimated the damage that a fall in house prices might do.

The economic dip in 2001-02 was much less serious than that of 2008-09, but we have had longer to pull out of it. So now the US and UK economies are in a similar position, in cyclical terms, to where they were in 2004 or 2005. Those two snapshots of our economy – consumer confidence and car sales – put the UK very much in that danger zone – the moment where you want to get policy right to avoid the really nasty consequences that may follow three or so years further down the line. They are amber, not red, warning lights, but they are warning lights nonetheless.

So what should we conclude? I think the first thing to be clear about is that there is no immediate danger. There will, of course, be another global recession eventually and we will be clobbered along with the rest of the developed world. But our banking system, and the US one, is much more robust now than it was a decade ago. So it ought to be, given what happened then, but a lot of rebuilding has been done.

It is worth noting too that with our largest single export market – the eurozone – still pretty flat, it was inevitable that the UK recovery would have to be driven by domestic demand. Underpinning that demand has been the property boom, for consumer confidence and house prices track each other reasonably closely.

But the property boom, along with other flashpoints such as the current account deficit, will need to be tackled. That obviously has implications for monetary policy. I expect that in another 10 years’ time the memoirs of Janet Yellen and Mark Carney will acknowledge that they should have acted earlier in putting up interest rates. But this is not just about the cost of credit; it is also about the availability of credit. The central bankers will regret they did not do more about that.

It is a difficult message to get across. Yes, the country needs confident consumers that will go out and buy stuff, just as it needs confident home-buyers and a confident business community. And as far as both the US and UK are concerned, present confidence seems reasonably justified; neither country is heading over a cliff (at least not yet). But there is such a thing as the global business cycle.

If people are borrowing a lot, they need to be aware that interest rates will go up and that the price of assets, including property, may go down as well as up. Maybe we should mix a little caution into our confidence. Buy the new car, by all means, but put aside some savings too.