Doubtless many of us will be dining out in the run-up to Christmas, but with credit card debt hitting a record high in October, a few of us might be reaching for the Alka-Seltzer come the new year. UK households now have £66.2bn of credit card debt outstanding, a level that rose by £571m in October, with overall unsecured consumer credit up by 10.5 per cent over the preceding 12 months.
The issue was also raised this week by the Bank of England in its Financial Stability Report which warned on the high levels of UK household indebtedness, which has grown by 4.1 per cent in the year to September – the fastest rate since the financial crisis. This has been fuelled by credit-card and other unsecured lending.
On the face of it, the fundamentals underpinning the boom appear reasonably sound with high employment and earnings just about edging consumer price inflation. But could recent activity in the restaurant sector indicate that we've reached the high-water mark with regard to consumer credit and also foreshadow a contraction in aggregate discretionary spending in the UK?
The latest edition of Harden’s London Restaurants shows that new restaurants opened in the capital at a faster rate in the past 12 months than at any time previously recorded. Two hundred new eateries are recorded in the new edition, easily beating the previous record. However, the rate of closures was also the third highest in the past 26 years, and significantly up on last year's total, so the net rate was essentially flat on the previous year.
Three-months before the publication of the Harden’s figures, the Restaurant Group (RTN), owner of the Frankie & Benny’s and Garfunkel’s chains, swung to a half-year loss and announced it was shutting 33 underperforming sites as part of an internal review. At the time of the announcement we ventured that “above-market price hikes for food and drink at Frankie & Benny's has alienated its cost-conscious clientele”.
As if to bear this out, the accountancy firm Moore Stephens has warned that up to 5,570 restaurants in the UK now have a 30 per cent chance of going bust over the next three years. The industry is under threat from a combination of rising costs for food imports, moribund disposable incomes, and another hike in the national minimum wage, which will bring the hourly rate payable by restaurateurs to £7.50 for those aged 25 and over – a rise of 80p compared to the rates pre-April 2016.
Mike Finch, restructuring partner at Moore Stephens, believes that “it is unrealistic to expect UK restaurant groups to avoid the impact in the fall in the pound by substituting for UK produce”, so “restaurants have to make tough decisions as to how much they try to pass on to consumers”. This could hit footfall, margins or both.
With disposable incomes effectively flatlining over the past year, the pace of borrowing in the UK could be unsustainable. Back in April, we wrote that “the risk of widespread institutional bond default is very real, but investors also need to consider where we are in the UK retail credit cycle”. That was before the EU referendum vote, the subsequent depreciation of sterling, and the attendant worries over inflationary pressures and their effect on discretionary spending.
If you look at the broad money (M4) supply - measure of notes and coins in circulation plus bank accounts - you could be forgiven for thinking the economy remains in rude health. The metric surged during the second quarter of 2016 and that’s usually an indication of increased economic activity. Conversely, the contraction in M4 growth during 2011 and 2012 was a sign that commercial activity was faltering and the economy duly went into a double-dip recession.
However, the double-dip surge in the broad money supply earlier this year was a consequence of a rapid increase in cash positions among nervous fund managers and other forms of managed money. The comparison may well be specious, but the last time we witnessed a spike in the M4 measure on this scale was in the run-up to the banking crisis. Still, you shouldn’t let that spoil your Christmas lunch, assuming you can still afford one.
