Heading into 2018: The Latest Debt Research
This week, research in conjunction with the Bank of England has led to headlines that consumers in the UK are remaining in debt longer than previously thought. We’ve decided to take an in-depth look at this report, and others like it, to review the state of debt in the UK at the start of 2018.
Published on the 8th January, ‘Who’s driving consumer credit growth?’ is a report from the Bank Underground, a blog for Bank of England staff to express their personal financial views, in conjunction with Threadneedle Street herself and the Financial Conduct Authority. Its most crucial find, as widely reported, is that consumers are being trapped by their debt longer than previous studies had thought.
The June 2017 Bank of England Financial Stability Report had suggested that lenders’ consumer credit portfolios turn over relatively quickly; in other words, the accounts held by credit companies are resolved, or paid off, at a faster rate than mortgages are.
Reports such as this, however, neglected to understand the realities of life for people living with debt. By analysing data about individual borrowers, rather than just one of their accounts, quite a different picture emerges, as, rather than being paid off with relative speed, debts are more likely to be passed from company to company, most likely in order to take advantage of better interest rates.
As such, 89% of stock of debt in November 2016 was found to have been held by people who had already been in debt two years before. Although half of borrowers are those who had never borrowed before, these amounts are small, and the majority of the total amount of debt is held by people who have already been in debt for a significant period of time.
While this revelation may not come as much surprise to people struggling with debt, it is very important for understanding debt’s role in the economy, and how best to tackle the debt crisis.
A second interesting, but less widely reported, finding of the study was that credit growth has not been led by loans to subprime borrowers. Subprime borrowers are those who might not be able to pay back their loans, and so represent a large risk. The 2008 Financial Crisis was triggered by mortgage lending to subprime borrowers, which has led to a heightened awareness of such poor financial practice by financial institutions.
An analysis of debt on 0% credit cards, motor finance, personal loans and debt on non-0% credit cards demonstrated that over 75% of credit in all categories was given to those with the top 50% of credit score ratings. This suggests that, despite fears over the summer to the contrary, lenders are not acting irresponsibly.
This report, however, while representing good news for the economy, does not represent immediately good news for the consumer struggling with debt, who is likely to have a low credit score. This is not to say that loans should be extended to subprime borrowers, but more needs to be done to care for the consumer, and tackle the debt crisis to reduce the number of subprime borrowers.
Heading into 2018
Other reports and headlines since the beginning of the year can also be used to paint a picture of the state of personal debt in the UK at the beginning of 2018. Throughout 2017, reports of a debt crisis, and the looming Financial Crisis it could create, dominated the headlines. Will 2018 be much the same?
Global Debt hit an all-time high of $233 trillion, or £169 trillion, in the third quarter of 2017, according to the Institute of International Finance (IIF). This represents an increase of $16 trillion from the same period of 2016, and, worryingly, a debt which is three times the size of the global economy.
Debt, however, is not inherently bad, and in recent years there has been a serious debate among economists as to whether global debt has become excessive. Some argue that a debt of this magnitude, when compared to the global economy, increases risk and hinders international economic recovery, and over-reliance on debt could easily trigger financial crises. However, others note the speed at which global GDP is rising, currently faster than debt.
Ultimately, understanding global debt is not as important as understanding specific areas of debt. It is interesting to note that most of the world’s debt is owned by non-financial companies, followed by governments, then financial institutions, and that household debt is the smallest share at $44 trillion.
As such, there is good news – UK consumer credit growth is showing signs of slowing down. The Bank of England reported last week that consumer credit had only risen 9.1% in November 2017, 1.8% less than the 10.9% it had risen in November 2016. This represents the slowest that credit has expanded since December 2015.
Although the report notes that the difference between aggregate income and spending has also fallen to the second lowest level in 20 years, 5.2%, which could imply that there is a worrying dependence on personal borrowing for the country’s GDP growth; this does represent further proof that more responsible lending practices are taking hold.
As mentioned earlier, however, while possibly good for the economy, this news does little to reassure the 8 million people struggling with their debts, or the millions living in poverty, who might need access to credit as an essential life line. The bigger issue, as it was in 2017, is the ongoing UK personal debt crisis.
Persistent Debt Crisis
The Royal Society of the Arts (RSA) released the other key study on financial living standards this week. In this study, they found that four in five workers are concerned about inflation overtaking their pay. A large proportion identified themselves as ‘Just About Managing’ (JAMs), and feared that small price increases could add up to a serious financial problem in their households.
Their key worries included:
- The high cost of housing
- Housing insecurity, and forced relocation due to financial strain
- Personal Debt
- Inflation outstripping pay
These examples of in-work poverty denote the real struggle facing 2018. Atif Shafique, a senior researcher at the RSA stated:
‘Having a job is no longer a guarantor of economic security: more than 7 million people in working households live in poverty, wage growth lagged behind inflation for most of the last decade, and close to 8 million people in the UK live with problem debt’
Another concerned voice, Trades Union Congress (TUC) General Secretary Frances O’Grady added:
‘Working people are in the middle of the longest pay squeeze since Napoleonic times, with real wages still lower than before the financial crisis… The pay crisis should be the government’s first priority’
The TUC’s own analysis of figures from the Office of National Statistics has reported similar results, as real wages were found to have dropped 4.4% from 2007 to 2017, but they also add that UK corporate profitability rose to 12.6% from 1.4% in the same period. O’Grady sees this as evidence that working people are being exploited by big business:
‘Not only does Britain deserve a pay rise, but this evidence shows that business can afford it too’
The State of Debt
Reports over the last couple of weeks have shown that debt might not be the threat to the economy that economists feared over much of last year. Responsible lending practices are certainly good news in this regard. However, this does not mean that the debt crisis is going away, as housing, living standards, homelessness, and wages are all still in crisis. These are all problems that can be made significantly worse through debt problems.
If you need more information about the options available to you in dealing with your debt, you can always speak confidentially with one of our friendly advisors on 0808 2085 198.