A BOOM in consumer credit has fuelled growth in the debt of UK households which is now close to its 1980s peak, according to Fitch.
The ratings agency said that UK households’ swing into an aggregate net financial deficit position over the last year is almost unprecedented.
It had only previously occurred briefly during Nigel Lawson’s tenure as Chancellor of the Exchequer 30 years ago, according to Fitch.
Two key factors behind the trend were greater residential investment and lower private pensions saving relative to income.
“More recently, the UK household debt to income ratio has risen, retracing more than a third of its post-global financial crisis decline, in contrast with the US, and is likely to keep rising given the sector’s financial deficit,” said Brian Coulton, Fitch’s chief economist.
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“This has been largely driven by growing consumer credit, notably car loans. Low interest rates mean the rise has yet to increase the debt service burden.
“But weaker household finances reduce the resilience of consumer spending – by far the largest demand component of UK GDP – to shocks.”
According to Fitch’s calculations, the effective interest rate on all UK household debt fell to 3.3 per cent last year, which it says rate has saved household borrowers between £20bn and £25bn in interest payments since 2009.
Although the agency says a major interest rate shock appears unlikely, a more immediate shock could come from tightening credit supply.
“Any performance deterioration in UK consumer loans would be from a very strong level,” said Coulton.
“Recent stress testing by the Bank of England highlighted strong capital buffers against severe consumer credit losses.”