Consumers took full advantage of the profusion of cheap credit advertised by lenders in recent times, as credit card usage and gross unsecured borrowing rose at an annual rate not seen since before the financial crisis of 2007-8.
The Bank of Englandís most recent findings showed a 6.4% rise in unsecured borrowing over the year to October, with personal loans and overdrafts & credit card borrowing increasing by 700m and 400m respectively in October alone.
With lenders continuously undercutting each otherís prices, consumers have capitalised on the multitude of low-interest loans flooding the market in order to fund luxury products such as new cars and major home refurbishments, with the providers of these also offering various deals in attempts to prise away consumerís cash.
The consistent deal-sweetening tactics deployed by credit card providers regarding their 0% credit card for purchases continues to tempt borrowers into taking on more liability in pursuit of their desires, edging the UKís gross amount of unsecured debt up to £168bn amid suggestions that the Chancellor has gloomy news regarding the nationís cash-flow in his Autumn Statement this week.
The reality is that we have an economy being propelled by unsecured consumer borrowing, on the back of the Bank of Englandís continued delaying of an interest rate hike ñ a move which it says is to prevent individuals from being subjected to the economic pressures which accompany a higher base rate; despite this levels of debt continue to spiral.
Howard Archer, chief economist at IHS Global Insight, warned that consumersí need to address their debt situation if they want to see genuine growth in the economy.
He said: ìWith debt levels relatively high, there is the concern that even a small rise in interest rates during 2015 could cause problems for a significant number of people. However, it currently looks unlikely that the Bank of England will raise interest rates before the latter months of the year.
Furthermore, the Bank has indicated that still high consumer debt levels are an important factor why it will only raise interest rates gradually over the longer term,î he added.
Those hit hardest by the financial crisis will do well to remember the barren years of spending from 2007 to 2009 due to their debt-ridden pockets before risking taking on high levels of credit again to fund any improvident aspirations they may hold.
That caution to the wind aside, increased consumer willingness to borrow ñ especially for more expensive purchases ñ points to a recovering economy, as highlighted by the Office for National Statistics assertion that UK enjoyed 0.7% economic growth in the 3rd quarter of this year.
However, net lending to businesses fell for the second month, this time by a sizeable £1.9bn in a blow to the wider economy.
Despite falling mortgage approvals and thus prolonged waning house demand, the majority opinion from economists is that these will pick up again, and more pertinently will organically lead to rising wages in real terms.
ìSince mortgage rates have fallen to a record low, a revival in real wages is underway and uncertainty about the leverage ratio has declined, we continue to think that a recovery in mortgage lending will get going again soon,î said Samuel Tombs, an economist at Capital Economics.
“With inflation now likely to stay lower for longer after oil’s slide, mortgage interest rates are falling again. Banks plan to ease up on credit restrictions, wages are finally stirring and the recovery should pick up pace again next year,” said Rob Wood, top UK economist at Berenberg Bank.