UK household debt: still amongst the highest in the world
With the publication of the McKinsey report, Debt and (not much) deleveraging, debt is back in the news.
But while McKinsey (an ultra-prestigious consultancy) appears to seek deleveraging, the UK is poised to head in the opposite direction. As widely recognised, the Office for Budgetary Responsibility (OBR) forecast now shows household debt in 2019 at 182 per cent of disposable income, seriously exceeding its pre-crisis (2008) peak of 169 per cent. Over the coming years, debt increases are set to outpace vastly incomes and earnings.
This rise is not only underpinned by mortgage debt and the housing market expansion, but also heavy increases in the use of credit. In fact the growth of credit is forecast to exceed pre-crisis peaks.
Whether or not these forecasts come true, this post outlines how UK households remain heavily indebted, both relative to past experience and other countries .
Annual growth in household debt, per cent
In 2017 credit growth is forecast at 16.6 per cent, in 2002, the previous peak, growth was 14.4 per cent. (source: National Accounts and OBR supplementary economic tables, Table 1.11 )
Now these figures are all based on OBR forecasts, and some see in the scale of these increases in indebtedness a message about the implausibility of the present course for the economy.
But any such growth comes on top of a household debt position that is now still very high relative to history, even in spite of some deleveraging. The chart below shows a longer-run time series based on ONS data, including some historic figures that extend beyond 1987, with the latest OBR forecast added to the end. These are given as a share of GDP rather than household income, to enable comparability with other countries.
UK household debt as a share of GDP, per cent
So in 2014, with debt at 95 per cent of GDP (on the basis of OBR figures), deleveraging had proceeded as far as the position between 2003 and 2004, i.e. ten years ago. But even then, debt was still severely elevated relative to historic experience.
More context comes from international figures. These are taken from the recent (June 2014) CEPR/ICMB paper Deleveraging? What Deleveraging?, which has household debt as a share of GDP for a number of developed economies.
Household debt in 2013 as a share of GDP, per cent
As seen, even after deleveraging back to the position in around 2003/2004, UK debt in 2013 is still among the highest in the world. Were the OBR forecast to hold good (and other countries not to budge, admittedly implausible), the UK would take second place.
A previous post discussed how this was impacting on the ground, with the massive use of credit just to get by, and the vast scale of the consequent restructuring industry and charities helping the indebted to shoulder the burden – not least StepChange (who have just issued an ‘action plan‘). And much more needs to be said on other areas of private debt, not least private financial and non-financial companies. But for the moment the figures serve as a reminder that economic expansion has been underpinned by ever-increasing indebtedness for a very long time. The financial crisis of 2008-09 is understood to have been driven by the unsustainability of this position; while the crisis has been arrested – up to a point – it is not clear that the underlying problem has been resolved.