It’s all over! Or is it?

Wednesday, 15th August 2018

It’s all over! Or is it?

The Daily Mail’s Alex Brummer was in no doubt. He said this:

‘The Bank of England has signaled the financial crisis is finally over with the decision to lift interest rates to the highest level in a decade….’

You can imagine the sheer relief that swept through the Gibson household once Brummer had issued his resounding all-clear….

At last! Thank goodness! The ‘emergency’ that began a decade ago and took interest rates to the lowest level in the Bank of England’s 300+ year history is finally over….

The Bank has raised the base rate of interest all the way from 0.5% to the dizzying heights of 0.75%….

Things can finally get back to ‘normal’….

Or can they?

What about the financial crisis that lies just around the next corner?

  • Pockets of risk….

It was last September when the Bank of England’s Financial Policy Committee (FPC) described the burgeoning consumer credit market as a ‘pocket of risk’….

The consumer debt pile in Britain at that time amounted to £200 billion….

The FPC issued some stark warnings that, if the economy took a turn for the worse, rising defaults on that consumer borrowing could result in High Street banks losing up to £30 billion….

We haven’t heard much from the Bank about that ‘pocket of risk’ since. But that doesn’t mean it isn’t there or has gone away….

Here at Money Truths, we don’t see that much has changed….

Except for the size of that consumer debt pile – which has only increased in the meantime….

  • They haven’t gone away….

Appetite for consumer credit certainly doesn’t appear to be diminishing….

Figures from the Finance and Leasing association, for example, tell us that households are borrowing more than £100 million per day on finance to buy new motor vehicles….

Bank of England data reveals that total credit card borrowing has risen from £65 billion two years ago to £72 billion today….

And that non-credit card consumer lending continues to grow at 8.5% per annum….

Outstanding consumer credit volumes are rising. So too is the average amount of debt per head….

Borrowing has been cheap and easy. Millions of households have taken out loans or spent on credit cards to maintain a comfortable standard of living….

  • Worrying signs….

Figures from the Office for National Statistics reveal that over the last 12 months outgoings surpassed UK household incomes for the first time since 1988 – with households spending £25 billion more than they earned….

That last figure fuels concerns about the long-term financial health of households that might be over-committing and over-stretching themselves – borrowing money they might not be able to pay back in the event of some unforeseen change to their circumstances….

There are signs that some households and consumers are already struggling under the burden of debt they have built-up….

In the three months up to June this year, the number of people declaring themselves insolvent hit a 6-year-high….

A record number of individuals have taken out Individual Voluntary Arrangements (IVAs) – where debtors agree to pay creditors some or all of what they owe over time….

  • The economy is as strong as an Ox?

I imagine some of you are already composing the email….

‘But, Dave. You’re missing the point of what they said. All this consumer debt is only a problem if the economy takes a turn for the worse. And the economy is as strong as an Ox. Mr. Carney and his team at the Bank of England have so much faith in the strength of the economy that they just raised the base rate. Relax, Dave. The economy is A-OK.’

And Mr. Brummer of the Daily Mail agrees with what you say. He says this:

‘The UK’s economy is doing fine…. growth is roaring back with both manufacturing and construction doing well, and the City’s exports of financial services are at record levels.’

I know I shouldn’t worry. I know that Mr. Brummer has told us what he thinks about the economy and that should put my mind at rest….

But the economy is this huge abstract complex thing that nobody really understands and that nobody can really control….

And it’s not a one-size-fits-all deal either. The economy works in different ways on different groups and different interests at any one time….

I know financial exports from ‘the City’ are going great guns. And I am totally excited by that. But that’s happening way up in the air….

Down on the ground, where all this consumer debt is building-up, the economy doesn’t look or feel so robust….

  • Down at ground level….

Politicians are trumpeting ‘record’ employment levels….

But the reality is that many of the jobs that have been created are gig-economy roles that produce variable income, zero hour contracts that can’t be relied on and low-paid or part-time roles….

Wage rises amount to the thin end of nothing and barely beat inflation which is still running above the Bank of England’s target at 2.4% and still putting the squeeze on already hard-pressed households….

The Resolution Foundation reports that millions of families it describes as ‘just about managing’ are no better off than they were in 2003….

It reports that 40% of low- to middle-income families feel they would be unable to save £10 a month….

And now an interest rate rise….

It is a small one for sure. And it won’t affect everybody….

But for households and consumers that have been relying on credit to fund their lifestyles, it could make servicing debts and refinancing that much harder. Additional rate rises will make it more difficult still….

  • The end of one thing or the beginning of something else?

Ground-floor interest rates were introduced as an ‘emergency’ measure to get us through the last financial crisis. The emergency lasted a decade….

That’s a decade of cheap and easy credit – warm waters that households and consumers were only too happy to wade into….

Maybe they waded out too far….

Maybe they can no longer touch the floor with their feet….

Maybe what has been borrowed will prove harder to pay back than it seemed at the time….

Raising the rate from 0.5% to 0.75% will do a little to stem more consumer borrowing. But it won’t disappear the liabilities that have already been racked up. And it won’t help hard-pressed households pay them off….

Maybe Alex Brummer is right. Maybe the economy really is booming. Maybe it will solve all our problems. Maybe all this borrowed money will be paid back….

But it doesn’t smell that way at ground level. Maybe what looks like end of one crisis is going to introduce itself as the start of another….

That’s how it looks from here….

All the best,

Dave Gibson

Money Truths