The new reality of debt-fuelled Britain

Tony Ward

January 11, 2016

Tony Ward is chief executive of Clayton Euro Risk.

As the excesses of Christmas and New Year fade into memory, January is traditionally the month when the country’s collective mind turns to how much debt we as a nation have accumulated.

Figures from the Bank of England show that Britons are borrowing at the fastest rate in almost a decade. The amount of money being borrowed by consumers rose from £1.2 billion in October to £1.5 billion in November, creating an annual growth rate of 8.3%, the largest rise since February 2006. Outstanding household debt – including mortgage and credit card lending – hit a record £1.5 trillion in November.

This has provoked some commentators to voice concerns that the debt-fuelled spree could shudder to a grinding halt, leaving consumers high and dry. The TUC’s general secretary Frances O’Grady suggested: “If people start building up household debt, then at some point they’re going to get in trouble.” The Money Advice Trust chimed in, too:  it was concerned by the figures, and expected an increase in personal debt in the months ahead. “These figures confirm that we do need to keep a watchful eye on the huge growth in consumer credit,” said Joanna Elson, its chief executive.

I certainly agree with these comments, however I wonder if we have to be quite so concerned that we will go into free fall. An article in this week’s Economist prompted me to think again about the whole question. It quite rightly states that “what counts for sustainability is the debt stock relative to the incomes out of which repayments are made”. Household debt as a percentage of income peaked at 160% just before the 2008 crash, when debt was roughly £64,000 per household. By 2014, that number had fallen to about 130%. Only very recently has the household debt ratio started inching up again.

Furthermore, even though borrowing may be on the increase, those taking on new debt seem most able to repay it, with the number of households unable to service debt falling according to another report from the Bank of England. In 2008, 13% of consumers spent some 30% or more of their pre-tax income on mortgages; now only 10% do so. Also, those falling into arrears have dropped in recent years, helped undoubtedly by low interest rates.

Despite George Osborne’s comments that 2016 is likely to be one of the toughest since the financial crisis and that people must not be complacent that the economy is fixed, most analysts expect growth will stay strong. Some experts have even argued that increased consumer borrowing provided a useful boost to economic growth. “Credit flows are continuing to strengthen gradually, providing much-needed support to the economy as growth is hindered by slowing real income gains, the fiscal squeeze and the strong pound,” observed Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

I agree that it remains undesirable for household debt to rise relative to income ad infinitum, and it certainly makes sense to keep a watchful eye as to how thing unfold. However, for the time being, rising debt may not be our biggest concern.

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