January 6, 2017

Regional Pain Makes UK Consumer Credit Risks Real

by Breakingviews

Diverging fortunes across the UK imply a hike in consumer borrowing could damage Britain’s economy just as it looks to leave the European Union. After 11 percent compound growth over the 12 months to November, unsecured consumer credit stands at 192 billion pounds ($238 billion). Bank of England Chief Economist Andy Haldane played down concerns on Thursday, concentrating on a more moderate rise in mortgage debt.

Historical data supports Haldane’s view – up to a point. Household debt is around 130 percent of disposable income, down from 150 percent in 2008. The lion’s share, at just over 100 percent of income, comes from mortgage lending that should be safer due to it being collateralised. The recent growth in areas likes car loans and credit cards still only leaves consumer credit barely above its long-term level at a third of UK household income. And car financing is arguably less risky than billed given the vehicles act as collateral.

Yet growth in UK credit card debt to a record 67 billion pounds is troubling. And there are other reasons why the BoE’s chief economist may be underestimating the risks of the recent binge.

First, unemployment ticked up in several parts of the UK in the three months to October. In just one month, the jobless rate rose 0.6 percentage points in Scotland and 0.4 percentage points in the northeast and east of England, according to Bernstein analysts. Only higher levels of employment in London stopped the overall country-level number declining.

Second, these depressed regions are the most exposed to unsecured borrowing. In all three, personal lending accounts for a greater proportion of household debt than mortgages, research by Bernstein’s Chirantan Barua shows. Last year’s UK consumer spending numbers were also flattered by a one-off boost that came from a rise in the minimum wage.

Finally, a banking sector price war stoked by new entrants could worsen any future reckoning. Sainsbury’s Bank now offers unsecured personal loans at below a rock bottom 3 percent. Cheap central bank funding and quantitative easing may support banks’ margins for part of this year. But they could wear off just as default rates spike. If that double hit to profitability transpires, a credit crunch could follow. Haldane may be sanguine, but Britain’s consumer credit boom carries real risks.


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