Consumer borrowing is at highest rate in a decade

 

Figures show consumer credit rose by 8.3% in the year to November, with an increase on borrowing on credit cards up by £411m according to Bank of England figures.

 

The Government's official forecaster, The Office for Budget Responsibility, expects the household debt-to-income ratio to keep rising until the end of the decade, returning to its pre-crisis peak by 2020.

 

However British consumers aren’t spending more on the high street because of newly increased wages or lower costs of living, as real wages aren’t anywhere near pre-crisis levels, which means consumers are using credit to buy. 

 

Worryingly, whilst consumer borrowing is growing at its highest rate for 10 years, business lending and investment is down. 

 

Manufacturing figures have suggested that the sector may be reaching stagnation, meaning that UK growth comes overwhelmingly from British consumers buying more in the shops, not from investment or exports, potentially leading to instability in the economy. 

 

However Mark Carney, Governor of the Bank of England has said that Britain's recovery is not driven by borrowing, as public sector debt has dropped since the crisis, though he suggested the situation required vigilance. 

 

Consumer debt will be unable to continue to rise indefinitely, especially when interest rates rise, though this is looking increasingly unlikely to be this year.

 

When interest rates rise, consumers with a lot of debt will be hit by the extra cost of their loans and credit cards. Furthermore, as mortgage approvals are continuing to pick up speed, any rate rise could cause many to find their mortgage becomes unaffordable, pushing them into debt and further borrowing. 

 

The rise in borrowing has concerned debt advice charities, with Debt Advice Foundations CEO David Rodger saying;

 

"The continuing rise in the supply of consumer credit alongside the long term decline in real wages should concern us.  It’s important that the Government doesn’t lose sight of the impact of a debt-fueled economic recovery on households up and down the country."

 

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