Household debt is higher than in 2008, is history repeating?

08 Jan 2017, by Kam Gill in Economics

The latest TUC figures on household debt show that consumer credit is still filling the gap left by anaemic wage growth. Data from the Bank of England shows that total consumer credit (that is excluding both mortgages and student loans) grew by 10.8% in November 2016 compared with a year before. Analysis undertaken by my colleague Geoff Tily has found that total unsecured debt (i.e. not mortgages) hit £350bn in the third quarter of 2016, well above its peak of £290bn before the 2008 crisis. Some of this will be increased student fees, but as the BOE rate above shows, this cannot be all the full story.

Total figures have only limited use in any case. The real eye-opener comes when we look at debt per household. The chart below shows the nominal (cash) value of debt per household in the UK. As of quarter 3 of 2016 each household owed £12,887.45. That is a rise of over £1100 and the largest, single year increase since the turn of the century.

Share of debt per household (£)

This suggests that another comparison may prove illuminating: the rate of debt to gross disposable income over the same period. The chart indicates the level of debt owed by households by presenting the total stock of debt compared to the total amount of disposable income available. The rate of debt to household income was 27.4% in the third quarter of 2016, this is approaching the pre-crisis peak of 29% in the first quarter of 2008.

Debt to income ratio (%)

Next year living standards are expected to decline.

The last few years have seen anaemic growth and calendar year inflation of effectively zero for much of the time. However, as we discussed in November’s economics roundup inflation has already begun to tick upwards and will continue to do so in 2017 as price increases from sterling’s devaluation feed through to consumers. Wages are not predicted to follow suit, or at least not to the same degree. Predicting the impact of inflation is tricky, as it’s possible for households to decrease expenditure in response to increased prices. Reducing discretionary expenditure is all very well, but there’s a limit to how much you can reduce your non-discretionary spending. A family with children, for instance will struggle to put a very low floor on their spending on food or fuel both of which may start to cost more next year. As a result we are likely to see this ratio become even less healthy over the next few quarters.

Typically we would expect inflation to reduce the value of debt, which is a good thing for debtors; as the value of the stock of debt declines making repayments easier. Next year, however, households are facing a double whammy that means as costs and borrowing go up, while real earnings decline. Inflation is unlikely to counter-act this increased cost of living, with negative impacts on debt flows.

Employment has been strong but for how long?

Strong employment growth has been one of the defining features of the past few years. However, while unemployment has been the dog that didn’t bark of the downturn, there are signs that jobs growth may be petering out and unemployment is predicted to increase over 2017. Next year will see a number of in and out-of-work benefits cut which will put further pressure on household budgets.

As we’ve discussed before; there are two problems with levels of household debt like this. The first is the obvious pressure it places on individuals and households. The other is that debt like this creates a drag on growth, as money spent servicing debts cannot go on more economically productive spending.

We need action on this.

The Chancellor has already made some welcome moves towards fiscal policy, however as Geoff Tily pointed out last month, this is small beer compared to what is needed. We need urgent action to increase job security and get pay moving in the right direction. Otherwise we leave families and our economy at the mercy of another rising debt bubble. And we all remember where that got us last time.