As the election on 8 June nears, the debate has intensified over how much Britain’s frothy cappuccino-drinking economy can cope without endless dollops of interest-free credit.
Financial regulators are worried about it. So are the debt charity workers who pick up the pieces when the debt merry-go-round grinds to a halt. And they should be worried. Many of the biggest, shiniest new cars zipping round UK streets would still be sitting on the garage forecourt without ultra cheap credit deals that rival mortgages for their rock-bottom rates.
On the high street, shops have in recent years relied more heavily on consumers using their credit cards for big purchases. Back in 2014 these shoppers could avoid paying the 18.9% interest commonly applied to credit card balances and use the two, even three-year interest-free period many card operators allow.
As we know from recent experience, when debt bubbles burst, they hit everyone and drag the economy down into recession. The Bank of England’s most recent data for April shows that the mania for borrowing last year and the year before has paused somewhat since January. That should be seen as good news. Net mortgage lending is down at levels seen a year ago while unsecured borrowing on credit cards and loans has stabilised at a growth rate of of just over 10% a year.
But not everybody at the Bank of England will be content to see consumers putting their credit cards in a drawer. The economists attached to the BoE’s interest rate-setting committee know the economy runs on debt. To adapt a well-known first world war poster, they know Britain needs borrowers.
If a reminder of this basic economic rule was needed, it was made clear earlier this month when the latest UK GDP figures appeared. The relative lack of borrowing in the first three months of the year coincided with a dive in GDP growth from 0.7% in the final quarter of 2016 to 0.2% in the first quarter of this year.
The BoE has busted a gut to keep the mortgage market afloat with one scheme after another to subsidise everything from deposits to the lenders themselves. It must have been upsetting to see a fall in approvals for house purchases in April for the third month in a row.
Now there are signs that the credit habit is returning as almost zero interest rates work their magic again, Easter’s spending is out of the way and wage rises are being outpaced by inflation. Analysts say GDP growth in the second quarter will be higher for this very reason. Is that a return of consumer confidence with shoppers shrugging off the election, they ask? Or is it, as the debt charities suspect, cash-strapped consumers rolling over their debts and taking out a bit more credit just to get by?
The latest consumer surveys back up the debt charities. Markit’s household survey revealed Britons are the gloomiest they’ve been since 2014 about their personal finances. The GfK consumer confidence survey was down in May, according to the seasonally adjusted version. So it could be that extra borrowing is born of distress rather than confidence. And the starting point for extra borrowing on credit cards and loans is already 10% more each year.
Of the nation’s spenders, the Financial Conduct Authority estimates that 3.3 million are in “persistent credit card debt”, which means they are paying 18.9% interest or more and suffering the consequences. That leaves Britain with a choice between accepting the assurances of regulators that they can manage the UK’s tottering personal debt mountain or clamping down and risking lacklustre, sluggish growth.
If only Melrose was in it for the long haul
It is Bonus Bingo time again. The four top directors at Melrose Industries, an engineering group and turnaround specialist, are to share share a bonus pot of £160m, paid in shares. Each will be handed £40m.
The quartet run a business, just admitted to the FTSE 250, which turns around struggling manufacturers and sells them on at a premium price. They pay lots of tax due on those bonus shares – in this case £70m – which they will cover by selling a few of those shares.
But so much more money might have found its way into the companies owned by Melrose if only it didn’t, like a private equity firm, see itself as a vehicle for extracting value and handing it to shareholders.
Around £3.5bn has been returned to investors over the past five years, the firm said. This money might have built some of the companies it owns into world-beating businesses. Instead, take Elster, a maker of smart electricity meters among other industrial components, which was sold in January to US firm Honeywell. The charge to Honeywell was £3.3bn and two final salary pension schemes in deficit.
A clever deal, no doubt. But not the kind of deal that helps UK plc, especially when the pound is low and UK businesses vulnerable to takeover.
UK policymakers face a dilemma over public's slowing demand for credit
Phillip InmanWhile the economy needs more borrowing in order to keep growing, personal debt is already at dangerously high levels
As the election on 8 June nears, the debate has intensified over how much Britain’s frothy cappuccino-drinking economy can cope without endless dollops of interest-free credit.
Financial regulators are worried about it. So are the debt charity workers who pick up the pieces when the debt merry-go-round grinds to a halt. And they should be worried. Many of the biggest, shiniest new cars zipping round UK streets would still be sitting on the garage forecourt without ultra cheap credit deals that rival mortgages for their rock-bottom rates.
On the high street, shops have in recent years relied more heavily on consumers using their credit cards for big purchases. Back in 2014 these shoppers could avoid paying the 18.9% interest commonly applied to credit card balances and use the two, even three-year interest-free period many card operators allow.
As we know from recent experience, when debt bubbles burst, they hit everyone and drag the economy down into recession. The Bank of England’s most recent data for April shows that the mania for borrowing last year and the year before has paused somewhat since January. That should be seen as good news. Net mortgage lending is down at levels seen a year ago while unsecured borrowing on credit cards and loans has stabilised at a growth rate of of just over 10% a year.
But not everybody at the Bank of England will be content to see consumers putting their credit cards in a drawer. The economists attached to the BoE’s interest rate-setting committee know the economy runs on debt. To adapt a well-known first world war poster, they know Britain needs borrowers.
If a reminder of this basic economic rule was needed, it was made clear earlier this month when the latest UK GDP figures appeared. The relative lack of borrowing in the first three months of the year coincided with a dive in GDP growth from 0.7% in the final quarter of 2016 to 0.2% in the first quarter of this year.
The BoE has busted a gut to keep the mortgage market afloat with one scheme after another to subsidise everything from deposits to the lenders themselves. It must have been upsetting to see a fall in approvals for house purchases in April for the third month in a row.
Now there are signs that the credit habit is returning as almost zero interest rates work their magic again, Easter’s spending is out of the way and wage rises are being outpaced by inflation. Analysts say GDP growth in the second quarter will be higher for this very reason. Is that a return of consumer confidence with shoppers shrugging off the election, they ask? Or is it, as the debt charities suspect, cash-strapped consumers rolling over their debts and taking out a bit more credit just to get by?
The latest consumer surveys back up the debt charities. Markit’s household survey revealed Britons are the gloomiest they’ve been since 2014 about their personal finances. The GfK consumer confidence survey was down in May, according to the seasonally adjusted version. So it could be that extra borrowing is born of distress rather than confidence. And the starting point for extra borrowing on credit cards and loans is already 10% more each year.
Of the nation’s spenders, the Financial Conduct Authority estimates that 3.3 million are in “persistent credit card debt”, which means they are paying 18.9% interest or more and suffering the consequences. That leaves Britain with a choice between accepting the assurances of regulators that they can manage the UK’s tottering personal debt mountain or clamping down and risking lacklustre, sluggish growth.
If only Melrose was in it for the long haul
It is Bonus Bingo time again. The four top directors at Melrose Industries, an engineering group and turnaround specialist, are to share share a bonus pot of £160m, paid in shares. Each will be handed £40m.
The quartet run a business, just admitted to the FTSE 250, which turns around struggling manufacturers and sells them on at a premium price. They pay lots of tax due on those bonus shares – in this case £70m – which they will cover by selling a few of those shares.
But so much more money might have found its way into the companies owned by Melrose if only it didn’t, like a private equity firm, see itself as a vehicle for extracting value and handing it to shareholders.
Around £3.5bn has been returned to investors over the past five years, the firm said. This money might have built some of the companies it owns into world-beating businesses. Instead, take Elster, a maker of smart electricity meters among other industrial components, which was sold in January to US firm Honeywell. The charge to Honeywell was £3.3bn and two final salary pension schemes in deficit.
A clever deal, no doubt. But not the kind of deal that helps UK plc, especially when the pound is low and UK businesses vulnerable to takeover.