Autumn Investment Monitor 2017  

UK credit markets could feel the brunt of slowdown in growth

UK credit markets could feel the brunt of slowdown in growth
Consumer credit growth versus BoE base rate in the past 10 years

As someone with a shiny new car on a finance deal, I can understand the appeal for consumers. But is the growth witnessed in the past few years a real risk to the UK economy, or should we sit back and enjoy the comfortable, air-conditioned, bluetooth-enabled ride?

Not only is the motor vehicle industry super cyclical, buying a car has become incredibly easy over the past decade. Personal contract purchases have become the norm, with the vast majority of new cars being bought this way. 

The fear is that rather than just experiencing a normal economic slowdown, the car market could be hit extremely hard, as vehicle manufacturers themselves have been leading the way in offering finance. Hence a potential double whammy.

But while the concern is there for manufacturers, the wider UK banking system is less exposed, given the biggest providers of car finance in the UK are subsidiaries of global vehicle manufacturers.

The Bank of England (BoE) expressed some unease when analysing the potential blow-up of the market on the UK economy and financial system. But its overall view is that the banking system is not very exposed to car finance, since approximately 60 per cent of lending is done by non-banks.

But what of the wider consumer credit market? The latest BoE Financial Stability Report has some clear warnings.

Lending to individuals in the form of consumer credit grew by around 10 per cent in the year to April 2017, close to the fastest annual growth rate since 2005. 

In addition, consumer credit has been increasing much faster than household incomes in recent years. 

During that period, car finance has seen the fastest expansion, though other forms of consumer credit accounted for more than half of growth in the past year. 

Roughly half of net consumer credit lending was from banks, with loss rates remaining relatively low.

We know the risk to the wider economy is if we see shocks to the system, such as rises in interest rates, or significant falls in consumer confidence and rising unemployment.

At present it is hard to make a case for interest rates going up in the UK any time soon. There has been a reasonable spike in inflation this year, but this has largely been driven by the fall in sterling, which appears to be close to being washed through the system. Combined with the impact of ‘shrinkflation’, it seems unlikely that inflation is going to go much higher than its current level and perhaps it could now start to moderate.

So while it does feel as though the UK consumer is in a fragile position, if rates stay low and there are no major shocks, then consumers should muddle through. 

But just surviving is not really something to shout about. Recent earnings have been encouraging, and the strength of the worldwide economy is clearly good for globally exposed UK companies, especially early-cycle sectors such as airlines, recruiters and select industrials. 

The economy as a whole has not gone into recession, but growth has slowed and Brexit is undoubtedly a factor.