Consumer credit growth slowest for 3 years – what’s this telling us?

Amanda Gillam
20th September, 2018
Credit Cards

Something is happening in the UK economy right now. The number of British consumers increasing their borrowing grew by the smallest margin for three years. This, combined with a very small fall in the number of mortgage application approvals, has led to concerns about economic growth in the UK, particularly with Brexit on the horizon. So, UK consumers are not borrowing at the same rate as they might have been previously. But what does that tell us about the economy as a whole and what we can expect in the near future? consumer credit growth slowing

The official growth figures

According to the Bank of England, unsecured consumer credit grew by 8.5% in July of this year. That’s a drop of 0.3% on the figures for the month before and significantly below average for the past three years. These new statistics come in the wake of nationwide concerns about the high level of UK unsecured borrowing. Official figures provided this year indicated that, in 2017, British households spent, on average, around £900 more than they had coming in.

What could be causing the drop in growth?

British consumers are starting to curb spending habits. It could be the imminent arrival of Brexit and fears over an increase in the cost of living. Or an anticipation that interest rates might rise again. Whatever the reason, unsecured consumer credit growth could simply be slowing down because people are spending less. Many consumer groups have reported a new caution with respect to spending habits and the consequence of this could be people cutting back on non-essential purchases.
Lenders are not as willing to lend. With rising numbers of personal insolvencies and uncertainty about the financial future – especially interest rates – it’s not just consumers who are nervous. Lenders reducing the credit they make available to consumers in order to minimise their own risks could also be causing the drop in unsecured consumer credit growth. With a small slowdown on secured lending – e.g. mortgages – also happening during this time, it’s possible that lenders are reigning in their risk in general.

What does the slowdown say about the UK economy?

Although consumer spending and borrowing trends change fairly frequently, conclusions are already being drawn in terms of what this change could mean for UK economic stability.

Weaker levels of consumer spending. British consumers have been spending at high levels in recent years, as official figures have confirmed. If there is less demand for credit then this means that there is less money flowing back into the UK economy via credit spend.
A potentially weaker economy? Consumer spending is what drives the British economy and if this is beginning to drop away, the result could be a weaker economy overall.
The reality of unsustainable levels of debt. Debt has always been a part of British spending habits ever since it first became widely available to consumers. However, debt levels have been identified as worryingly high by experts in recent years. New consumer borrowing fell from £1.5bn in June to £800m in July – which is significantly below average for the past three years according to the Bank of England. Could this be a sign that we are finally acknowledging that debt levels may be unsustainably high?
More people are starting to feel overwhelmed by debt. Roughly 3.4 million people are now struggling with serious problem debt according to the charity StepChange. The slowdown in consumer credit growth could be an indication that this is beginning to bite for more people and across a wider section of the British economy. If current debts become unaffordable then consumers are much less likely to continue borrowing.

It’s still possible to borrow – and borrow well

Although many levels of borrowing have fallen, credit is still available to those who are looking for it. And it’s still possible to borrow in a positive way.

Make sure your monthly repayments are affordable – after the repayment comes out do you have enough to comfortably meet all your obligations?
Shop around for the lowest interest rate – there are some good deals out there, especially if you have a sound credit rating
Limit the number of applications that you make – if you submit a lot of applications in a short space of time then you could damage your credit score
Borrow only what you need – debt can be a great way to get ahead in life as long as you’re not borrowing in excess of what you really need
Compare your loan & credit options before committing to your preferred solution.

Although the slowdown in UK consumer credit growth is certainly a sign that people are spending less, it remains to be seen what this means for the economy – and whether it will continue. Factors such as interest rates and Brexit will heavily impact in ways that are simply not forecastable yet.