Household borrowing is slowing down. The Bank of England is likely to say next week that consumer credit growth has slowed to under 6.5 per cent, its weakest rate since 2014. Should we worry? I suspect not.
It could be that people are becoming more pessimistic about the future and so scared to borrow. Research group GfK might report next week that consumer confidence has dropped to its lowest level since 2013.
I’m not convinced by this. We have another robust measure of consumers’ attitudes. It’s the ratio of retail sales to the All-Share index. This ratio has done a good job of predicting economic fluctuations in the past. It was high in 2004 and 2009, just before recoveries in the stock market and economy, and low in 2001 and 2007, just before falls in both. It is now slightly above its post-1996 average. This is a sign that consumers are in better than average spirits.
So why are they borrowing less? In part, it is because lenders have become more fussy about who they lend to: the Bank reports that lending standards have tightened slightly recently.
But there’s another reason. It’s that real wages are now rising. This means people need to borrow less and some can afford to pay off a little debt.
How far this can continue is, however, doubtful. With labour productivity barely growing, real wages are unlikely to grow by much. Which means households won’t have the resources with which to pay down debt easily.
Do they need to? Certainly, household debt looks high. At £1.62 trillion (excluding student loans) it is equivalent to almost 14 months of post-tax income for the average household. This is near a record high.
But we can put this another way. For someone with disposable income of £3,000 a month (roughly equivalent to £50,000 pre-tax income) it is equivalent to debt of just over £41,000. For the average household, this comprises a mortgage of just over £35,000 and consumer debt of over £5,000: this includes car loans as well as credit card debt. We wouldn’t call someone in this position overextended, would we?
But of course, averages are not helpful here. What matters is the relationship between two separate distributions. One is the distribution of debt. The other is the distribution of future changes in income. If people who are highly indebted see good rises in their incomes while drops in income are concentrated among the cash-rich then we have no problem: debt is sustainable. If on the other hand it is the highly indebted who suffer falls in income then we do have a problem. Either they will have to cut spending or sell assets, or they will default on their loans, imposing losses on lenders that might force a tightening of lending standards.
We honestly cannot tell which it will be. History, though, does give us a clue. Serious economic downturns have almost never been caused by households borrowing too much. They’ve been caused instead by policymakers raising interest rates too much – such as in 1980 or 1989-90 – or by banks being unable to refinance their liabilities: the banking crisis of 2008 had many causes, but consumer loan books turning bad were not among them. All this tells us that we should worry much less about the mistakes ordinary people make, and much more about the ones that people in authority make.
