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Analysis

Post-referendum Britain is living on debt

by Vicky Pryce | 02.08.2018

The Bank of England (BoE) seems to have been infected by the schizophrenia bug that has affected many areas of government policy since the referendum. After all it is the BoE that, since mid-2016 has been the “only game in town”, helping the economy survive despite little support from the fiscal side or from the politicians running the country.

And yet, the 0.25% interest rate increase announced today is bound to affect many sectors of the economy, particularly consumer spending which accounts for 60% of the economy and which has provided much of the growth, however modest, in the UK in the last two years.

How has consumer spending been sustained? Mainly through borrowing which is what the Bank of England wanted to encourage when it cut interest rates to 0.25% in August 2016 and injected a huge amount of fresh cash into the economy to ensure that financial stability was preserved and the economy continued to perform after the Brexit vote.

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For consumers easier borrowing conditions were crucial. The sharp rise in inflation post referendum was not matched for most of the period since by compensating wage rises despite higher employment levels. There have been falls in real disposable incomes in a number of quarters in the period since. Keeping up spending had to be done through increased borrowing.

Post referendum we have been living on debt. BoE data shows that the average increase in net lending to individuals was £5.1 billion per month in 2017, up from £4.1 billion in 2015. Latest figures show in June 2018 net lending was £5.4 billion. Consumer credit rose 8.8% on the previous year, credit card lending was up by 9.5% and mortgage lending increased 3.3%.

The economy has become unbalanced because of Brexit. Britain relies too much on over-indebted consumers to continue to grow. Household debt as a percentage of GDP at 87% is edging up to the previous records of 97%. For the first time since 1988 UK households last year were net borrowers, spending some £900 each more than they received in income, according to report by the ONS last week.

Brexit uncertainty is increasing. Forecasts for the economy are being constantly downgraded. Productivity fell again last quarter. There is no doubt that borrowing excesses need to be tackled. Killing the golden goose that is consumer spending, if that is what interest rate increases from here on end up doing, will expose the myth of continued prosperity outside the EU for what it is. A myth.

Edited by Hugo Dixon