One of the issues of the credit crunch era has been the subject of debt. Often it is sovereign debt that is discussed but of course the private-sectors of the world often also piled it up in the pre credit crunch era. This is a factor in the policy response of many central banks who have cut interest-rates sharply and increasingly even into negative territory as a way of cutting the interest or running costs of such debt. A problem with this is that whilst it may provide something of a short-term boost it also encourages the accumulation of yet more debt as incentives for saving are reduced and the cost of credit drops. It provides an incentive for behaviour which is exactly the reverse of the deleveraging which is what central banks claim that they want. Also we have seen that in our increasingly fractured and divided economic world the interest-rate cuts do not directly reach the areas that most need them. An example of this has been the periphery in the Euro area.
There have been two main additional measures in the UK to reinforce the credit position. First cam some £375 billion of Quantitative Easing by the Bank of England and second the summer of 2012 came its Funding for Lending Scheme which boosted mortgage lending and our banking sector. Today I wish to widen the analysis of its impact and also consider how it has impacted unsecured lending such as personal loans and overdrafts.
Unsecured Borrowing Surges
Price Waterhouse produced a report last week with some numbers which will send a chill down the spine of those familiar with UK economic history.
Britons added nearly £20bn to their total unsecured borrowing during 2014, an increase of nearly 9% on 2013 – the largest percentage rise in more than a decade.
As Karen Carpenter sang so beautifully, such numbers remind me of this.
All my best memories
Come back clearly to me
Some can even make me cry.
Just like before
It’s yesterday once more.
The likely trends according to PwC are as follows.
Total unsecured borrowing now stands at £239bn, the equivalent of £8,936 per household …. PwC projects unsecured borrowing will grow over the next two years by between 4% and 6% annually. This projected rise would leave the average UK household with unsecured borrowing of close to £10,000 by the end of 2017, taking consumers into uncharted territory in terms of borrowing levels.
That phrase “uncharted territory” in terms of unsecured borrowing sends a sharper chill down the spine. What could go wrong?
One feature of these numbers is the inclusion of student loan debt in the PwC numbers as many versions these days omit it. If we consider the position of student loan debt whilst we hope it is secured on our student’s futures it has no bricks and mortar backing so they do have a point. Also it is important that we allow for its rise and do not shuffle it down some statistical back-alley as some of the official data tries too. I guess they do not want to record the impact of the rise in tuition fees.
The average student loan value in 2014/15 is £11,710, a jump of more than 35% on last year’s figure.PwC estimates that the typical student who began university post 2012 will graduate with unsecured debt of between £40,000 and £50,000.
Of course this is debt but in some respects not as we know it as it often does not cost anything for a while and there are doubts about how much will ever be repaid but it is debt nonetheless. So we find a new facet of an old problem. It always leaks out somewhere doesn’t it?
If we look at today’s Bank of England data we see that this is one area where it has been able to generate some credit growth.
Consumer credit increased by £0.7 billion in February,compared to the average monthly increase of £0.9 billion over the previous six months.The three-month annualised and twelve month growth rates were 4.9% and 6.6% respectively.
I would not get too hung up on the monthly number as it is an erratic series which is also affected by rounding but an annual growth rate of 6.6% is more than double our rate of economic growth. A more exact breakdown is given below.
Within consumer credit, credit card lending increased by £0.2 billion in February in line with the average monthly increase over the previous six months. Other loans and advances increased by £0.5 billion compared to the average monthly increase of £0.6 billion over the previous six months.
In case you were wondering the total amount of unsecured debt in the UK was £169.1 billion in February according to the Bank of England. Also the range of growth rates goes from a frosty -2.3% in June 2010 to a red-hot 21.5% back in the early part of 1988.
Interest-Rates on Unsecured Debt
This is a story of two halves. So let me start with the sector which has seen a change and that is personal loans. If you were to borrow £10,000 now then the Bank of England has you paying some 4.5% as opposed to the 6.69% of two-years ago so quite a change. So it is no surprise to see more borrowing in this area as I wonder if it is related to this. From the Society of Motor Manufacturers and Traders or SMMT and the emphasis is mine.
The number of new cars registered has risen every month since March 2012, as the UK continues to bounce back from the recession and consumer demand has been driven by exciting new products and attractive finance deals.
Exciting new products sounds rather like the “innovation” of Irish financial products pre credit crunch.
The other half is of interest-rates on credit cards (17.8%) and overdrafts (19.7%) which have been rock solid over the past couple of years. In fact they have moved little at all in the credit crunch era in spite of all the official interest-rate cuts and measures we have seen.
Also there is another factor which is that the range of interest-rates offered these days varies very much with one’s credit rating and I wonder how well the Bank of England data catches this if at all.
There is much to consider in the UK private-sector debt position. You see even the extraordinary push provided by the FLS only managed to push net mortgage lending just into positive territory as shown by the numbers for February.
Gross lending secured on dwellings was £16.2 billion and repayments were £14.5 billion.
I guess the official fear here was a period of net falls in mortgage lending which in another twist to the tale is of course what they have often claimed they want! So the boost to unsecured lending has helped give the economy another nudge forwards for now at least.
Intriguingly however the real surge has come from student loan debt. As the Bank of England data ignores it then I will move to HM Parliament data. At the end of the 2013/14 fiscal year it amounted to £54.3 billion as opposed to the £40.3 billion of 2011/12 and this is what is expected to happen next.
This is expected to grow rapidly over the new few years and the Government expects the value of outstanding loans to reach over £100 billion (2014-15 prices) in 2018 and continue to increase in real terms to around £330 billion (2014-15 prices) by the middle of this century.
For those of you wondering how much we owe as individuals in total the Bank of England calculates it at £1471 billion but it does not include student loans.
In a way this is a ying to Friday’s yang for the UK economy. There we see the positive impact of disinflation boosting the economy whereas today sees something familiar but not so friendly.