Bank warns consumer credit is a “pocket of risk that warrants vigilance”
Tackling the symptoms of the consumer credit boom without addressing the causes risks exacerbating the living standards crisis.
Consumer credit was prominent in the yesterday’s assessment of financial stability by the Bank of England. Up front a chart shows the accelerating growth in various measures of credit (red yellow green) against slowing growth in nominal incomes (light blue). The exception is ‘dealership car finance’, where growth has slowed but is still very rapid (dark blue).
(NB I have removed the footnotes – the original chart is in their executive summary here.)
The Bank / Financial Policy Committee (FPC) observe:
Consumer credit grew by 10.3% in the twelve months to April 2017 (Chart B) — markedly faster than nominal household income growth. Credit card debt, personal loans and motor finance all grew rapidly.
The report is seemingly careful to avoid saying that credit growth is excessive, but they are concerned enough to “[bring] forward the assessment of stressed losses on consumer credit lending in the Bank’s 2017 annual stress test. This will inform the FPC’s assessment at its next meeting of any additional resilience required in aggregate against this lending”.
Moreover the FPC announced measures to bolster the resilience of the banking system, namely “increasing the UK counter-cyclical capital buffer [CCyB] rate” – first from 0% to 0.5% and then likely to 1% at their next meeting. This is a technical measure aimed at ensuring banks are in a position to deal with changes in economic conditions. They stress that they are simply unwinding the reduction in the CCyB that was implemented in the wake of referendum, and that this is consistent with a standard risk environment.
The report certainly again puts the spotlight on consumer credit and by association the scale of household unsecured debt. We have repeatedly stressed that these pressures are the flip side of the unprecedented decline in wages.
The obvious question is whether the overall policy setting is to blame.
Ever since the financial crisis policymakers have left the heavy lifting to central banks, while governments have cut back on spending (even moreso from 2010), i.e. monetary ease / fiscal restraint. On the ground: throughout a living standards crisis, the government has relied on the consumer to keep the economy moving forward.
When announcing the Bank’s support to the economy in the immediate wake of the referendum, Mark Carney stressed he couldn’t do it alone , getting as close as it was possible for him to say that the Government needed to step in to support growth. [The BBC reported: ‘”Monetary policy cannot immediately of fully offset the economic implications of a large, negative shock,” he said.”The future potential of this economy and its implications for jobs, real wages and wealth are not the gifts of monetary policy makers. “This will be driven by much bigger decisions; by bigger plans that are being formulated by others.”’]
But the ‘bigger plans’ fell somewhat short. In his 2016 Autumn Statement, Philip Hammond may have allowed for the effects of weaker predicted growth by permitting higher borrowing, but his investment package / capital spending still falls short of the very low bar of the coalition and current spending was barely touched .
Instead of considered interventions to support economic activity across the country and to bolster public services, the government has simply left it to the consumer. Meanwhile, the housing market has repeatedly been inflated, e.g. by the initial ‘funding for lending scheme’ and ‘help to buy’ (and the Bank are on the case here too – noting a possible loosening of lending standards). Now the pressure on consumers is doubled – any threat of tightening credit conditions (including recent noises about rate rises) comes on top of the resumed and severe fall in real incomes caused by the sterling devaluation, which has led to rising inflation, alongside slowing growth in nominal wages
In the meantime the pressures on people intensify. Charities that support those crushed by the weight of debts like StepChange are busier than ever before.
Maybe action is needed on credit, but without a change in our approach to delivering growth that results in higher wages and better quality jobs, it’s hard to see that helping with the looming living standards crisis.