Saturday, 19 April 2008

Credit cards bail out the UK economy

(click on the chart for a sharper image)

Could the UK economy be heading towards recession?

Recent data hasn't provided much evidence of an impending slowdown; inflation remains elevated, unemployment is low, while retail sales numbers during first months of this year were reasonably strong. However, the combination of unsecured credit growth coupled with fourth quarter 2007 GDP data could point to a possible weakening of consumption expenditure.

The story starts with unsecured credit- which is mostly credit cards. After seveal monthsof declining growth, unsecured credit surged during the second half of last year. This marked a dramatic turnaround. Credit card debt peaked just after the crazy spendfest of Christmas 2005. Since then, banks have become increasingly reluctant to allow households to run wild with their credit cards. Instead, banks shifted their credit activities towards loans secured on housing.

Since the credit crunch began, households added about ₤13 billion to the outstanding stock of unsecured debt. That is quite a jump; equivalent to additional one percent of GDP in just half a year.

(click on the chart for a sharper image)

Did this surge in consumer credit lead to an equally impressive increase in consumption expenditure. Actually, no. As the above chart shows, the contribution of consumption to overall GDP growth slows quite sharply towards the end of last year.

How do we reconcile an increase in consumer credit with slowing consumption expenditure? Household post tax incomes are being squeezed, and in order to maintain current levels of expenditure, people are increasingly turning to their credit cards. Since people often have some room on their cards before they hit their credit limits, it is possible for unsecured credit growth to increase temporarily.

Going forward, the ability of unsecured credit to sustain consumption is quite limited. At some point, the UK consumer will hit the aggregage credit ceiling. Then consumption will have to adjust. That moment of truth is probably upon us and the credit card will no longer prop up UK growth.

10 comments:

Anonymous said...

So you do requests now.

Anonymous said...

Good article Alice. I've been saying this for a while. People had a last fling of the dice leading up to Xmas 2008, then opened their credit card statements in January and shat themselves.

This is the quarter that consumer spending falls of a cliff. It's not an orderly decline because credit limits are a hard stop.

Expect lots of retail bankruptcies. And note the impact on CRE as landlords no longer have people fighting to be tenants.

Nick

Mark Wadsworth said...

Good research. I guess that people are just paying their mortgages with credit cards.

Alice Cook said...

Mark,

I understand that there is some evidence to suggest that people are paying mortgages with credit cards. It is total nonsense of course. It is the final act of madness before the whole rotting structure comes crashing down.

Alice

Alice Cook said...

Nick,

I am still waiting for the coming collapse of consumption. As the post implies, there was something strange happening in q4 last year. I suspect we will see a dramatic slowdown this quarter.

Thanks for the comments.

Alice

Anonymous said...

Alice,

Yeah, the statistics are lagging indicators but I don't think there's any doubt what's happening.

Nick

MrM said...

Alice,

What is the source of your (scary!) data?

Thanks!!

Alice Cook said...

mrm,

You are right to pull me up on this. I really should be a little clearer on my data sources.

The unsecured credit data is from the bank of England, while the consumption data is from the ONS.

Both are available online.

Alice

MrM said...

Alice,
Does BoE also have data on the amount of banks' contingent liabilities?
I wonder if the cc debt is growing together with credit card lines or consumers are getting maxed out on their lines?..

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