If the UK is Borrowing Less, Why Aren’t Consumers Following Suit?

Since the Great Recession of 2008, the UK’s economic struggles have been embodies by a huge fiscal deficit. This encouraged the incumbent Conservative government to embark on a controversial program of austerity and spending cuts, which has impacted in public services and the quality of living for those at the lower end of the earnings scale in the UK.

Last month saw the deficit on Britain’s day-to-day budget finally eroded as government borrowing returned to pre-crisis levels, however, two years after former Chancellor George Osborne’s initial target set in 2010. This came amid surprising levels of economic growth in the UK, with productivity and trade also improving on the back of a weakened pound.

While government borrowing may have subsided, however, consumer debt is rising at a disproportionate rate. According to credit rating agency Fitch, households in the UK are now borrowing more than they are saving for the first time since the so-called “Lawson boom” of the 1980s, as consumers continue to spend outside of their existing means.

What Does this Mean for the UK Economy as a Whole?

The consumer borrowing boom is understandable, of course, particularly when you consider that real wage growth in the UK remains stagnant.

Similarly, the rate of inflation remains disproportionately high at around 2.7% (despite a 0.3% during the first financial quarter), creating a scenario where customers are being encouraged to borrow cash in order to cope with an inflated cost of living.

While the recent surge in consumer borrowing may be underpinned by logic, however, the extent at which capital is being loaned continues to raise concerns within the banking sector. After all, banks and building societies draw their capital from individual savings and investments, before leveraging interest to boost returns and earn a profit.

In a climate where households have less money and an unwillingness to save, however, two things happen. Firstly, banks have less capital to loan to invest in a bid to optimise their profits, which makes them vulnerable to future economic crashes. Secondly, customers can become over-reliant on borrowed capital over a period of time, before seeing credit become less available and their standard of living (and not to mention solvency) compromised.

This is precisely the type of scenario that can trigger a widespread economic collapse, such as the one that brought the world to its knees back in 2008. Even though private lenders can partially bridge this void by using their own capital, there is still a chance that capital will become scarce while businesses and consumers alike struggle to repay their debts.

The Last Word

While the UK economy continues to showcase surface growth in terms of increased output and low unemployment, there remain concerns that these figures are papering over long-term cracks.

More specifically, the fear remains that the economy is being driven by short-term trends and consumer borrowing, with some experts arguing that Britain’s eventual departure from the EU and a sudden clampdown on lending could trigger a widespread recession that hits the UK hard.