Could the end of PPI claims affect the economic recovery?

I can still remember the day that £2000+ of reclaimed PPI money dropped into my bank account. It came as quite a surprise really as I hadn’t even received the final letter from the bank to tell me they had agreed to my demands. Where did the money go? Well at the time my wife and I had just bought our first house and it was a much needed and welcome addition to the renovation budget. In that sense the money went straight into our account and then straight back out again, into the hands of building suppliers and home improvement stores like B&Q – which was our second home at the time.

When you think about it, our PPI money was probably a much needed boost for those guys too. The economy had just gone off a cliff and businesses were closing left, right and centre. I’m also sure that I haven’t been the only one injecting my PPI refund straight back into the economy over the past 6 years or so. I know that some people will have been sensible with the money, placing their refund into a savings account or using it to pay down debt. However, I’d guess that the vast majority will have been a little less sensible, using their cash windfall to book a holiday, buy a new car or perhaps something else a little more frivolous. With all of these PPI claims having added spending power to the consumers pocket and in turn the economy over the past few years then it does beg the question, what will happen when the PPI money dries up?

Claims are on the decline

When you consider that most banks stopped mis-selling PPI when the crisis began back in 2008 and also when we take into consideration the sheer amount of claims that have already been made, there was always going to come a point when the flow of claims would start to slow. Figures released from the Financial Conduct Authority yesterday could well point to the start of this downward trend in PPI claims, with claims down by 22% in the second half of 2013 when compared to the previous 6 months. At over 1.39 million complaints, that is still a heck of a lot of money that could find its way into the economy this year but we can see that it is starting to decline.

So will an end to PPI reclaiming affect the economy?

An article in the telegraph in February stated that over £13 billion had been paid out in PPI claims since 2008 and that the big four banks had set aside over £20 Billion for PPI claims in total. In fact, over the past 18 months or so, banks have paid out around £12 Billion in PPI claims to customers. It may surprise you to learn these figures represent an economic boost equivalent to around 1% of UK GDP, so it is a significant amount of money. To put that figure into perspective – as Robert Peston pointed out – it is bigger than any economic stimulus the government has attempted since the financial crisis began and it is of bigger effect than the temporary VAT cut you might remember back in 2009.

In short then, it’s a huge amount of money to lose from the economy and it could be a big problem for certain sectors of business, like the motor sales industry for example. PPI claims have provided many people with the deposit to purchase a new vehicle. As this money disappears we may see a decline in this area. Tourism could be another sector which takes a hit. I have no figures to back this up but just thinking about it logically, how many people out there will have booked a holiday or at least a nice weekend break away with some of their PPI refund money? I’d think a good few. And as we mentioned earlier, what about those who have spent their refund money on home improvements or new furniture? The drop-off in claims may prove to be a problem for DIY and furniture stores then.

An end to the PPI economic boost will, however you look at it, have some negative impact on consumer spending. Whether this proves to be a major problem for the economic recovery remains to be seen. I’m sure it is something that will be on the minds of many business owners who operate in sectors that could take a hit though.

Did you get a PPI cash boost recently? If so, did you spend it or save it?

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2 Responses to Could the end of PPI claims affect the economic recovery?

  1. I got my mortgage in 2009 so no claim but if I had an extra cash infusion right now, I would look for ways to invest it.
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