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Weekly Economic Briefing

UK

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The UK economy built up significant credit imbalances in the lead up to the financial crisis. Aggregate household and private non-financial corporate (PNFC) debt surged from 145% of GDP at the end of the 90s to just under 200% of GDP by the time that Lehman brothers failed. Property was a critical component in this leverage cycle. Mortgage lending more than doubled over this period, alongside a booming housing market and dangerously loose credit conditions. On the corporate side, commercial real estate lending more than quadrupled, as a bubble developed in the sector. The crash triggered years of steady deleveraging across both sectors. Aggregate debt bottomed at 170% of GDP in 2015 before stabilising at these lower, albeit not low, levels.

Giving consumers credit Turning the taps off

While aggregate debt dynamics have been broadly stable, there are sections of the economy where credit growth is noticeably accelerating. Interestingly, this is not centred on the usual suspects in the property sector. Bank lending for commercial real estate has fallen in 26 of the 33 quarters since the crisis struck, bringing this as a share of total PNFC lending down from 43% to 30% at present. There has been a much smaller adjustment in mortgage lending. This stagnated between 2008 and 2015 and while there has been a modest acceleration recently, last year’s 3% growth stands in stark contrast to rates between 10-15% in the early 2000s. Instead, it is consumer credit which is showing the most heat. This has grown some 24% since the trough in 2013, and delivered an 8% increase last year, driven by a combination of credit card lending, car finance and personal loans (see Chart 4). While consumer credit only accounts for 13% of household debt, these trends have been raising eyebrows – not least with this playing an important role in supporting household spending over recent quarters.

With real incomes expected to fall this year, we will need to see further strong borrowing to prevent a slowdown in consumption and broader UK activity. With savings already at record lows there are doubts over households’ willingness and ability to continue accruing debt. Indeed, the Bank of England’s (BoE’s) latest credit conditions survey suggests that banks have already tightened the availability of unsecured lending to households, and plan to aggressively tighten this over the next three months (see Chart 5). Certainly this raises questions over both the demand and supply for consumer credit. The BoE will be monitoring these developments from both a monetary policy and a financial stability perspective. Its Financial Policy Committee warned in March that the rapid growth in consumer credit could provide a risk to financial stability, particularly if accompanied by weaker underwriting. Indeed, in its most recent stress tests, consumer credit accounted for £19bn of impairments among UK banks – larger than the £12bn forecast for mortgages. To address these concerns the Prudential Regulatory Authority has launched a review into lending standards across the different components of consumer credit. While regulation can provide a useful first line of defence, the Monetary Policy Committee (MPC) will be nervous that its accommodative policy settings might be encouraging exuberance in this part of the economy. If consumers continue to borrow, fuelling further strong consumption, then more MPC members are likely to conclude that overall monetary conditions might be too loose at present.

James McCann, UK/Europe Economist