The Bank of England has expressed concern about the level of borrowing people have taken on in recent months
Like it or lump it, when consumer spending levels increase it’s used as an indicator that the economy is on the up and that confidence is back. As the recent annual report on family spending from the Office for National Statistics shows, consumer confidence is slowly returning and this, when looked at in isolation, signals that everything is fine.
Only, that’s not the whole story. Spending patterns at the moment might look like our consumer confidence has returned in full force, but if we are spending on the never-never we could be doing more harm than good.
As Frances O’Grady at the TUC has said, responding to the ONS data, “Too much household spending is being fuelled by credit card debt, which is growing at its fastest rate in nearly a decade.”
Which unmasks the real bad news: consumer debt is rising again and our financial health is getting worse.
This accords with recent Bank of England (BoE) figures which presented concerns about the level of borrowing people have taken on in recent months. The BoE ‘Money and Credit’ report shows that consumer credit is growing at its strongest levels since 2006; people are relying on personal loans, overdrafts and credit cards to make ends meet.
In late November, appearing before the cross-party Treasury select committee, the very well-respected Andy Haldane – chief economist and the executive director of Monetary Analysis and Statistics at the Bank of England – warned that consumer credit, and in particular personal loans, had picked up ‘at a rate of knots [which might] ultimately be an issue that the financial policy committee might want to look at fairly carefully’.
Of course our attention to personal debt is rather heightened at this time of year. As very important new figures from the Money Advice Trust show, the average family is expected to spend more than £800 celebrating Christmas this year, with the majority of the money being spent on food and drink, as well as cards and decorations.
Just as concerning is their figure that nearly a quarter (23 per cent) of Britons feel under pressure to spend more than they can afford. Furthermore, 23 per cent of people said they planned to borrow money to pay for Christmas food, compared with 21 per cent last year.
Christmas can be a very difficult period for those in a financial bother, but the return to personal borrowing is not simply a seasonal flash in the pan.
When recession hit many households started to cut back spending. Years after the crash, and as the economy as a whole began to mend, many low-income households were undergoing what researchers at the Personal Finance Research Centre at the University of Bristol once called the ‘practical recession’, where they made personal spending cutbacks, analogous to government spending cutbacks, on things such as heating, food or family luxuries.
While the UK economy has been out of recession for a sustained period of time, we are seeing fewer signs of the practical recession now, but this is not necessarily an indication that everything is ok.
Last month the Financial Conduct Authority (FCA), the city watchdog, published findings on their investigation into the credit cards industry, finding that around 60 per cent of adults have at least one credit card, with an estimated £61bn in outstanding balances, while some two million credit card-holders are currently in arrears or have defaulted.
As the FCA made clear, this should be a trigger for lending firms to help customers out, however the millions of borrowers who make minimum payments on credit cards are so profitable to those credit card companies that they feel no inclination to help them.
Hopefully these findings spur on the regulator to come up with some creative ideas on how to incentivise firms to help customers who make minimum payments on their cards. Perhaps within the framework of responsible lending, banks could draw up a definitive joint commitment to offer assistance to borrowers when their payments get smaller and debts grow larger, triggering warning signs.
Though some may argue this merely papers over the cracks, particularly as far as low-pay is concerned. As the song goes, there is often too much month at the end of people’s money.
If Britons are endlessly borrowing on credit cards, perhaps this is a strong indication that wages are struggling with the cost of living. As the Resolution Foundation found in September this year, if economic trends continue the way they’re going, pay will return to pre-crisis levels by 2017.
We may call it consumer confidence, but an increase in unsecured debts is no way to sustain an economic recovery. Incentives for credit card companies to reach out to struggling borrowers is a must, but so too is a look at the state of wages. Even with George Osborne’s sop to living wage lobbyists, we’ve a massive mountain yet to climb.