Is the UK An Economy Built on Debt?Interest-Rates / UK Debt Feb 13, 2017 - 05:39 PM GMT
It’s fair to say that many experts have been surprised by the performance of the British economy since the historic vote to part ways with the European Union last year. Initially pessimistic growth forecasts continue to be revised upwards, and the outlook seems to brighten by the day – albeit that we are still at the very early stages of what is an unprecedented action.
Yet many have raised concern that the fuel for this impressive growth over the last six months has simply been consumer spending, and, more specifically, increased levels of household borrowing. Growth in personal loans and credit card usage is actually up by more than 10 per cent over the past year (the biggest increase since 2005), and it is expected that there will be a clampdown on lenders as a result.
But just how dangerous are the rising levels of unsecured household debt to the economy?
Low interest rates
Since the 2008 financial crisis, the core means for reigniting Britain’s economy – and indeed many others – has been a slashing of interest rates to record lows. This was a tactic used in the wake of the referendum too, as the Bank of England cut base rates to a new low of 0.25 per cent last August. This was done for the express purpose of stimulating spending by making credit cheaper. After all, the cheaper borrowing becomes, the more justifiable it becomes to take out loans, or finance purchases on credit.
It isn’t just base rates which have had an impact though. Perhaps an even bigger driver in the diminishing cost of borrowing has been increased competition. A space once dominated almost exclusively by the high-street banks has been infiltrated by an increasing variety of far more dynamic online lenders, who not only offer better-value personal loans, but also a superior service quality.
Interestingly, these online platforms are still subject to the same levels of control and regulation as any other high-street banks or building societies. That’s not to say that there aren’t some unscrupulous lenders within the marketplace, but certainly the levels of transparency required mean that anyone borrowing money from a company which is authorised by the Financial Conduct Authority should be well informed with respect to rates, fees, APRs and repayments.
Stricter levels of regulation, and a greater onus on lenders with respect to loan underwriting since the recession ensures more responsible lending, which should, in theory, mean that at individual or household level, we are living within our means, and only taking on debt which we can afford.
So is increasing household debt a problem?
It isn’t an easy question to answer. Of course there are risks to a credit bubble, as we’ve seen in the not-too distant past. The risk of another economic downturn could see Britain heavily exposed, as once-creditworthy debtors become unable to repay loans and/or obligations. Equally, any future increases in rates or borrowing costs will place an additional burden on those with variable-rate debts. In this respect, it is clearly preferable to have as low a debt-to-income ratio as possible.
But then again, consumer activity is the lifeblood of the economy, and with debt as cheap as it ever has been, is it not entirely rational to take advantage? Funding frivolous purchases on a credit card is clearly unwise, but getting a low-cost loan to finance things such as home improvements or a new car are entirely practical reasons to borrow. Indeed, cheap personal loans even offer individuals the chance to undercut pre-existing high-cost obligations by way of debt consolidation.
Ultimately, there is a duel responsibility at play here. Lenders need to continue to vet loan and credit applicants thoroughly to ensure they genuinely are creditworthy. But to a greater extent, there is a duty at individual level to ask yourself honest questions. Is taking on the credit you have in mind genuinely affordable? Is the loan purpose a justified one? Do you have any reason to anticipate a change of circumstance?
If you tick all these boxes, then there shouldn’t be anything standing in your way. It is in consumer self-interest to take advantage of cheap debt after all, and, as long as this is married with reasonable levels of restraint and caution, the wider economy should find itself on sounder footing.
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