Consumer borrowing is up. But will it last, and should we be concerned?


Consumer borrowing is increasing at its fastest rate in 11 years. As the chart below shows, outstanding debts (excluding mortgages and student loans) rose by 10.8 per cent in November 2016 – faster than any time since October 2005. This surge has inevitably prompted concerns that the UK is heading back down the path of credit dependence that ended badly. Yet when asked by the Treasury Select Committee this week, Mark Carney said that the situation appears to be under control. Is he right?


Certainly, when setting unsecured debts alongside household incomes, today’s situation looks somewhat different from 2007. New figures released today by the ONS, which adjust National Accounts data to provide a better indication of the lived experience of households, suggest that nominal incomes have also grown relatively strongly over the last two years – in line with recent survey data. This has helped to support increased borrowing.

Debt as a share of income is also well below eve-of-crisis levels. As the next chart shows, it peaked at 27 per cent in 2005 and remained at 26 per cent as the financial crisis hit. It subsequently fell sharply to 17 per cent as households reined in their spending somewhat. Despite the strong growth in 2015 and 2016, it still stands well below its previous level at 18 per cent.


Yet there is of course nothing to say that pre-crisis peak represents a useful benchmark. If we believe that borrowing was too high in that period then perhaps the relatively modest increase in the debt-to-income ratio observed over the last two years should provide more cause for concern. Whatever your view on that, what’s clear is that borrowing continues to play an important part in overall economic growth.

As the next chart shows, since spiking immediately post-crisis the saving ratio has fallen steadily over recent years. Today’s ONS figures (while volatile) show that the adjusted measure turned negative once again in Q3 2016. While we shouldn’t read too much into one quarter of data, the direction of travel is entirely opposite to the one predicted by many economists ahead of the vote for Brexit. Rather than saving more as an insurance against a more uncertain – and potentially less prosperous – future, households chose to fuel an increase in spending via more borrowing.


With this in mind then, perhaps the more interesting question is not whether the borrowing surge poses a financial risk that the Bank of England need concern itself with, but whether it can be sustained into 2017. With inflation set to rise over the course of the year and the possibility of a fresh squeeze on earnings, consumers may find themselves less able to drive economic growth by resorting to their credit cards.

Of course, we shouldn’t just focus on the macro picture. While not especially elevated, itas worth noting that a significant minority of households are already feeling quite stretched. The next chart (using recent Bank of England data) shows that roughly 12 per cent of working-age households spent more than 10 per cent of their gross income on unsecured debt repayments in the second half of last year, with more than 3 per cent allocating more than one-quarter of their income to repayments. Unsurprisingly, the situation is worse still for lower income households: more than one-in-five of those in the poorest fifth of working-age households spend more than 10p of every £1 they earn on servicing unsecured debts.


The perception of financial burden associated with unsecured debts is higher still. More than one-in-three (35 per cent) working-age households consider their unsecured debts to be a burden, with one-in-ten (10 per cent) describing the burden as “heavy”.

On the face of it, the surge in consumer borrowing undertaken over recent months looks to be something of a rebound from the declines observed between 2009 and 2012. With incomes growing relatively robustly in the last two years, it’s understandable that consumers have felt able to load up on loans once more. But, while we don’t look to be heading for a debt crisis, today’s uncertain outlook means that the borrowing data is likely to provide a good indication of the direction our economy is heading in as we move through 2017.