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Rising household debt could put the brakes on consumer spending and the broader economy
Thursday 02 Feb 2017 Author: Daniel Coatsworth

Eight months ago the country was in a bad mood, worried about sinking into recession and fearing for the state of the UK economy following the Brexit vote.

Today we are still in that nervous period despite better than expected fourth quarter GDP figures and upbeat consumer confidence data.

Media headlines over the past few weeks have focused on an improvement in consumer confidence in January, with many people in GfK’s latest survey (31 Jan) saying their personal finances are in healthy state.

Other headlines latched on to positive economic data, such as ‘UK remains fastest growing economy in the western world’ and ‘UK manufacturing “firing on all cylinders”.’

Why we aren't celebrating

There are reasons to retain a more cautious stance and not get carried away by the headline-grabbing data points.

The fourth quarter GDP growth was dominated by the services sector, worth nearly 80% of the economy. However, there was minimal growth in the construction industry versus the previous quarter and no growth in the production sector at all.

The services sector is heavily exposed to consumer spending. Its constituents include retail, hotels, restaurants, entertainment and recreation – alongside transport, health and education and more.

Consumer spending is therefore crucial to propping up the UK economy.

GFK’s latest survey shows that consumers are feeling hopeful about their personal financial situations over the next 12 months. Is this a reason to be cheerful? We’re not so sure.

We’re concerned about rising personal debt levels and feel that consumers could be relying too much on debt rather than hard cash to fund their shopping sprees.

Have you noticed how easy it is to get a credit card offering 0% interest for up to two years? You’d be feeling confident about your finances if you could borrow money for free.

But what happens when the interest-free period expires? The credit backdrop may have changed in that two year period and lenders no longer offering alternative products with 0% rates.

Vector illustration of roadsign for slippery road

Household debt alert

Average household debt excluding mortgages stands at a record £13,000, claims the TUC. The Bank of England’s latest Money and Credit report showed consumer credit grew by £1.9bn in November. The 12-month annual growth rate in consumer credit now stands at 10.8%, the highest level since October 2005.

I foresee a squeeze on household spending as a result of rising inflation and uncertain economic conditions potentially curbing decent wage growth.

People may feel comfortable about their finances now, but the story could be very different in a year’s time if rising interest rates put pressure on the ability to service debt repayments.

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