Rising consumer debt in the UK risks little chance of a repeat of the sub-prime debt crisis that precipitated the financial crisis, according to economists at the Financial Conduct Authority (FCA).
The forecast was published today (10 January) by the FCA and the Bank of England in joint research titled 'Who is driving consumer credit growth?'
It reported that while consumer credit growth, excluding mortgages, has been increasing at around 10 per cent a year, this should not be a concern for policy makers as the growth is being driven by consumers with strong credit ratings, rather than sub-prime borrowers.
It found the biggest increase in consumer borrowing is among people who do not have mortgages.
However the regulator said this is a concern because renters tend to spend more of their income on housing than do owners, so have less money for debt repayments, creating a “vulnerability” in the economy.
Though the report added that as younger people would be less likely to have a mortgage than older people, and the young's marginal propensity to consume (the term economists to define how likely someone is to immediately spend extra cash) is higher than an older person’s, it is intuitive that a renter would have more consumer credit than a homeowner.
The FCA research also found that consumers tend to be in debt for a longer period than was previously recognised.
This is because debt that “disappears” tends to reappear elsewhere, in that it has been refinanced, rather than repaid.
Fund manager Neil Woodford has long viewed rising borrowing levels in the UK as a positive sign for the economy.
He said economic growth happens when banks lend more, and that underpins his view the outlook for the UK economy is mildly more positive than the current consensus view.