What happens if consumer spending is debt fuelled but slows anyway?

Today brings us to a sector of the UK economy that has been running rather red-hot which is the unsecured credit data. The BBC caught up with this on Monday albeit from data which is incomplete.

Debt on UK credit cards is growing at the fastest rate since before the financial crisis, figures show.

The more regular use of these cards for smaller, contactless purchases explains in part the greater debt being built up over short periods.

However, figures from UK Finance show that the annual growth rate in outstanding credit card debt of 8.3% in February was the highest for 12 years.

Some of you will already be smelling a rat as you recall that it has been over 10% in response to the Bank of England opening the credit taps with its “Sledgehammer” in August 2016. It is interesting to see though that on this series we are finally getting the same message. Oh and if you are wondering who UK Finance are they are the new name for the British Bankers Association in the same way that the leaky Windscale nuclear reprocessing plant became the leak-free Sellafield.

If we look further into the data there was potentially good news for the economy which does fit with news elsewhere.

“Bank lending to businesses saw modest year-on-year growth in February, driven by investment within the manufacturing sector”

Today’s Data

The data from the Bank of England could have been released with KC and the Sunshine Band in the background.

Now it’s the same old song
But with a different meaning
Since you been gone
It’s the same old song

Or to put it another way.

The annual growth rate for consumer credit ticked up slightly to 9.4% (Table J), although net lending remains broadly in line with its previous six-month average.

The monthly number rose from £1.3 billion in January to £1.6 billion in February and the total is now £209.6 billion. If we break that down the fastest growing component is credit cards which if we annualise the quarterly growth rate have risen by 11.3% and now 11.2% in 2018 so far meaning the total is now £70.6 billion. But for that we would be worried by the larger other loans and advances ( personal loans and overdrafts ) which total some £138.6 billion and on the same criteria have grown at 8.2% and 8.5%. Individual months can be erratic but this sector has been a case of the trend is your friend for a couple of years or so now.

Never believe anything until it is officially denied

One of my favourite phrases because it works so well. Brought to you this time by the Bank of England credit conditions survey and the emphasis is mine.

The availability of unsecured credit to households was reported to have decreased again in Q4, such that reductions were reported in all four quarters of 2017 (Chart 1). Lenders expected a significant decrease in Q1. Credit scoring criteria for granting total unsecured loan applications tightened again in Q4, and lenders expected them to tighten significantly further in Q1.

So they reduced it in the third quarter if you recall as well cut it back in the 4th and then gave it a “significant decrease” to er 9.4% in February. This is heading into comical Ali territory now.

Back in February 2017 Governor Mark Carney told us this at the Inflation Report press conference.

From an MPC perspective, just to put those numbers into
context, on the most expansive definition, the increase in
consumer borrowing would contribute up to a tenth of the
increase in consumption. So it’s something, but it’s not
everything. This is not a debt-fuelled consumer expansion
that we’re dealing with.

Of course he may still have been rattled by the opening question.

Governor, back in August the forecast for GDP for this year
was 0.8%. Now it’s being forecast at 2.0%. That’s a really
hefty adjustment. What went wrong with your initial

This is not a debt-fuelled consumer expansion

I would like to stick with the statement by the Governor and bring in this from the Office of National Statistics earlier.

The accumulation of debt (measured by the amount of short-term and long-term loans households took out) in 2017 outstripped the amount of total financial assets they accumulated in the same period. This was the first time this happened since records began in 1987.

Also is anybody thinking of the Sledgehammer QE of August 2016 and of course the promises back then of further “muscular” action in November 2016?

Up until Quarter 3 2016, the households sector was a net lender. In the five quarters since, households have been net borrowers at an average of £3.3 billion per quarter. As a result, 2017 was the first year in which households were net borrowers – meaning that they had to borrow in order to fund their spending and investment activities.

Perhaps this is what the Governor meant at Mansion House last year.

This stimulus is working. Credit is widely available, the cost of borrowing is near record lows, the economy has outperformed expectations ( his especially).

Business Lending

This was supposed to be the main target of the Funding for Lending Scheme as it was fired up in the summer of 2012. The priority was smaller businesses so how is that going?

Net lending to SMEs has increased following a rather weak January

It rose by £700 million after falling by £700 million then. This means that the annual growth rate has risen from 0% to 0.1% and reminds us yet again of the true meaning of the word counterfactual.


So the beat goes on for UK unsecured credit although it seems to have taken UK Finance quite some time to catch up. The national accounts breakdown also tells us that there has been something of a shift although it includes secured debt and has issues with accuracy. On that subject if we stay with GDP here is an example of something from the research centre of the UK ONS.

Our initial results suggest that imputation of pension
accruals raises both the Gini coefficient and the geometric mean of equivalised household income materially, while the effects of imputing investment income are more marked on the Gini coefficient than on the geometric mean of household income.

So if we have imputed rent, pensions and investment income why not stop counting anything and simply input the lot and tell us that tractor production is rising. You may not be surprised to read that one of the authors is Martin Weale who is building a consistent track record.

Moving back to unsecured debt I note that the Bank of England ( of course Dr. Weale’s former employer )  is of course vigilant. But in spite of all this vigilance even growth at these levels does not seem to be helping the retail sector much as we observe a steady stream of receiverships and closures. On the more hopeful side falling inflation will help improve the real wages situation this year and mean that we may get some more of this.

UK gross domestic product (GDP) increased by 1.8% between 2016 and 2017, revised upwards by 0.1 percentage points from the second estimate of GDP published on 22 February 2018.

Happy Easter to you all.

23 thoughts on “What happens if consumer spending is debt fuelled but slows anyway?

    • Hi Chris

      These quarterly accounts from the ONS do not give much detail. For example your question made me curious so I checked a couple of data tables only for mortgages to be there as a job lot. So all we have is this broad brush.

      “In Quarter 4 (Oct to Dec) 2017, households have continued to accumulate more loans secured on dwellings (that is, mortgages) than unsecured loans (for example, credit card loans). In annual terms, the accumulation of unsecured loans and secured loans were similar between 2010 and 2015. Despite the rise in unsecured loans, the accumulation of loans secured on dwellings has begun increasing at a faster rate than unsecured loans in the last couple of years, as was the case before 2009.”

  1. In the late 80s there was a lot of remortgaging to spend on eating out, holidays etc. and inflation took off, hence the rapid rise in rates and early 90s crash. This time, the unsecured credit is much more about either rolling over the debt (ie: borrowing to pay the interest) or just borrowing for the essentials in life. The end result has been that discretionary spending is drying up (hence all the shopping and restaurant problems) while people are also out bargain-hunting on the Net, so consumption inflation has remained very low. We constantly hear the cry that rates “cannot” go up otherwise a lot of people will be in trouble. So, we should be seeing a steady rise in the default rate from now on,especially as mortgage lending is tightening, causing consumption and therefore GDP growth to tank further.

    Great idea to buy MBNA, wasn’t it, Lloyds?

    • ‘This time, the unsecured credit is much more about either rolling over the debt (ie: borrowing to pay the interest) or just borrowing for the essentials in life. ‘

      I think you’ve nailed it David.

      What will happen when the 0% balance transfers end?

  2. As I have posted here before, I believe that the restaurant problems are due to a flight to quality. The big groups with poorer service and lacklustre food are going to suffer whilst those restaurants offering something a bit different will prosper. I have just returned from 8 days in the north east where you would expect to be at the leading edge of any broad based downturn but not a bit of it. The places we went to were crammed full and doing extremely well every night ( and lunch times). Coffee shops and small restaurants in Newcastle were packed at lunch time on both days I was in the city and if you were not there just after 12.00am then no hope of a table. And these are ordinary eateries with with ordinary folk going into them. Country pubs and fish restaurants at the coast were the same. I was very pleased to see that.
    Locally (Gloucestershire) a couple of chains have closed, Jamie’s being one of them – and for a good reason – the food and service were terrible!
    I do wonder if discretionary spending is changing as well or at least what once was considered discretionary is now considered essential? I notice folk who don’t look that well off using the latest I phones and wearing very expensive labels. No doubt many consider it essential to have a paid TV subscription and have taken on a car that they really can’t afford simply because lease arrangements encourage trading up.All of these things drain cash out of the system that would be spent elsewhere.
    I agree that defaults on mortgages are going to rise if my kids friends are anything to go by. They have extended themselves are far as they could to buy the max affordable at current rates and will struggle if rates rise in future. It was inevitable that this would happen if the BofE left ’emergency’ rates as low as they have for as long as they have.

  3. Here in the midlands, the economy(i.e the housing market) is still red hot. Bricklayers won’t get out of bed for less than £250 a day, and good(and I mean good and fast) can demand £300-350 per day.

    Carney can predict rate rises as long as he likes, it is like me saying I am going to walk from Lands End to John O’Groats, and next week I will take my first step, the week after I will do another, but I will monitor my progress every time I get to a town, and should the pace be too fast I will pause!!!

    As long as rates do not go up appreciably, nothing will change, but every year this false property bubble based economy goes on, more and more future victims are sucked in and borrow ludicrous amounts of money that can never be paid back if rates normalise, so over to you Mr Carney, rate rise in May? – Don’t laugh.

    • I think you’re wrong there Kevin.Not in that rate rises won’t create a deal change, but that there isn’t a point where even the spendthrifts hit the affordability wall.

      From what I’ve seen the lack of a sustainable recovery is due to the fact the powers that be couldn’t get the savers spending. They managed to extend further debts to many who will never pay them back,but they totally misunderstood the fact that driving rates lower would actually lead the velocity of money down and not up.

      • Hi Dutch, I’d like to think you are right but the policies of the last nine years and the continuing presence of the likes of Carney to me makes it impossible for the wall you describe above to materialise.

        You are right about the refusal of the savers to spend, however the central banks have that one figured out as well, if the problem persists, they will create such inflation that the savers will have no alternative but to spend as their savings will be inflated away at 15%+ per annum(this is what is coming next). As usual, those in debt with no savings will be rewarded as their assets(their house) will at worst retain value, and at best gain in value.

      • This is an interesting feature of behavioural economics – theory and Carney suggested that low rates would prompt spending as the return on capital fell so low. In fact, savers (esp the many pensioners we are told “rely on the interest”) saw the interest vanish as inflation ate into the capital. Their reaction was to save more to compensate, further sucking consumption demand away.

          • And exactly what I said would happen.
            People’s savings are for security, not deferred spending.

          • This is why raising rates would encourage spending, because if your savings at least retain their value, then you are confident enough to spend the surplus.

          • you are correct and I have believed this for some time. Why is it such a hard concept for the BofE to understand? especially if, as we are often told, savers substantially outnumber borrowers.

    • You are right about the brick layers! That’s what I paid to have a new wall built around part of my property. having said that, the quality of the brickwork is superb – a curve in the wall achieved without seemingly any brick joints varying in width. Wonderful to watch people like that at work.

      • Hi Pavlaki

        That has not changed as some of the plasterers my father employed were of high quality. It was usually true that unless they were given some specialist work that they were by far the fastest as well. He had one who would finish at 1 pm and would produce excellent work yet my dad would get calls from site surveyors complaining he was gone. He used to say go and check what he has done…..

  4. I can’t wait to see your assessment of the BoE’s latest self congratulatory work on QE making the poorest in society better off thereby narrowing inequality. 😉

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