Authorization

Consumer debt boom is bigger than Lawson bubble, Fitch warns

The UK’s households are borrowing more money than they are saving for the first time since the so-called “Lawson boom” in the Eighties, the credit rating agency Fitch has warned.
British families are, on average, savers, putting money aside, usually in a bank account, which lenders then loan out to fund business investment. But for the past nine months households have been in deficit, which is storing up problems for the UK economy, Fitch said in a report published today.
“It is typically the household sector that does the saving,” said Brian Coulton, Fitch’s chief economist. “That has nearly always been the pattern in the UK, apart from one quarter in the late Eighties, at the peak of Lawson boom, where it moved into a deficit, and we know that didn’t end well.”
Consumer spending has helped to support the economy in recent years. But it has also left UK families with more debt than the average household faced three decades ago.
“Having made the effort to keep consumer spending going by drawing down savings quite sharply, it has now left the UK consumer in a vulnerable position if we get any negative shocks,” Mr Coulton warned.
Consumer debt boom is bigger than Lawson bubble, Fitch warns

Households are in deficit as never before - even in the Lawson Boom, when they last ran into the red
 The amount of debt consumers are taking on is rising at nearly 10pc on a year, while average earnings are up by less than 3pc. This suggests that the burden is increasing rapidly.
Household debt could even hit the peaks last seen before the financial crisis, undoing much of the work to reduce the burden since the crash. The debt to income ratio of UK households fell from 138pc in 2008 to a low of 122pc. But the latest rise in borrowing means debt is piling back up again.
“I don’t see in the near-term that this ratio is going to stabilise, it will continue to rise,” said Mr Coulton. “If it carries on at these rates it would take around four years to get all the way back up to the peak.”
The boom that occurred when Nigel Lawson was the Chancellor of the Exchequer in the Eighties ended in bust in part because of sharp interest rate rises, as well as the turmoil following Britain’s exit from the Exchange Rate Mechanism, which led to Black Friday.
The Great Storm 25 years ago that blew the boom to blazes
 This time round, however, the Bank of England is being cautious on interest rate rises. Mr Coulton believes that borrowers should be able to manage reasonably comfortably with any small increase in the base rate, but warned there were other risks that could plunge households into trouble.
One is the possibility of banks making their lending terms more onerous, thus reducing access to credit. Lenders are already moving in this direction because they are under pressure from the Bank of England to reduce risks in the financial system.
Mr Coulton believes this trend is already feeding through to the real economy: “That has been pretty well correlated with a very sharp slowdown in spending on consumer durables.”
Alternatively, a slowdown in the economy, potentially as part of a global slump, could push unemployment up from its current low levels, putting some households in financial danger.
Another risk is that foreign investment dries up. Household debt is largely financed by foreign investment from the eurozone, which is saving more than it needs. Such fund flow has been referred to by Mark Carney as “the kindness of strangers”. If this dries up, it could squeeze households hard.
See also:
Leave a comment
News
  • Latest
  • Read
  • Commented
Calendar Content
«    Май 2018    »
ПнВтСрЧтПтСбВс
 123456
78910111213
14151617181920
21222324252627
28293031