As robust as the economy has been throughout many events over the decades, there are indicators that the seas could get quite rough. The economy had only just recovered from its decade long erosion of living standards via the bank-led financial crisis when Brexit arrived and just as the uncertainty of that was calming, the pandemic arrived. Then Putin’s attack on Ukraine sucked all the headlines just as global inflationary pressures were being felt – which has since escalated. So why is credit card debt a signal of rough seas?
Yesterday, it was reported by the Bank of England that UK consumers had borrowed a record amount in February, with many economists commenting it was a sign of the cost of living crisis was actually hitting wallets even before Putin’s invasion of Ukraine pushed energy prices higher. There’s only one day to go before average energy prices zoom up by 54 per cent.
According to the BoE, individuals took on a net £1.5bn on credit cards in February. This was the highest monthly amount since records began in 1993.
To put that into perspective – that figure is more than 300 per cent higher than the average of £400mn borrowed in the previous six months. Total consumer credit, which includes personal loans and car dealership finance, now stands at £1.9bn net — the highest level in five years. And this is at the time when those households that are able to weather the financial storms ahead have more cash saved for several decades.
The FT reports that – “Consumer borrowing is usually considered a measure of spending growth, but with inflation at a 30-year high and falling consumer confidence, some economists have warned that it was increasingly a sign of consumers running into debt to maintain their standard of living.”
Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics said; “Weak sentiment also indicates that the big rise in consumer borrowing in February likely reflects households attempting to maintain their consumption at a time when real disposable income is falling sharply, rather than them going on a spending spree.”
Tombs went on to say that the data “suggest that the economic recovery is about to shift down a gear”.
The FT quotes a number of experts who concur. The latest money and credit figures “suggest that consumers are increasingly borrowing more to protect their lifestyles from the surge in inflation”, echoed Thomas Pugh, UK economist at the accountancy firm RSM UK. However, Paul Dales, chief UK economist at consultancy Capital Economics, said it was more likely that the rise reflected households having “the confidence to borrow and spend a bit more”.
The Office for National Statistics bi-weekly survey showed last week that 12 per cent of respondents were using credit cards more than usual to cope with increased prices in the first half of March. The proportion rose to 18 per cent for those aged 30 to 49 and to 21 per cent among renters. The same survey also showed that 10 per cent of people were now borrowing more from family and friends.
As reported by The Economic Times yesterday, the BoE governor Andrew Bailey said this week that the UK was facing “a historic” hit to real incomes this year, as the cost of living crisis spirals. Data by the BoE also showed that consumers are now depositing less money in bank accounts than before the pandemic. Households deposited £4bn in banks and building societies, less than the £6.3bn average in the previous six months and down from the monthly average of £4.6bn in 2019.