Having enjoyed the biggest borrowing binge in their history, British consumers are now starting to pay off their near £1.5 trillion of debt at the fastest rate in at least 15 years, according to the Bank of England.
The data adds to fears that the fragile recovery in the economy, still not officially confirmed, could be damaged by a return to thrift by households. Figures from the manufacturing sector also suggested a setback in the pace of industrial revival.
The Bank of England reported yesterday that total personal debt has fallen for the first time since records began in 1993. Personal borrowing—personal loans, credit cards and mortgages—fell by a net £635m in July, leaving the total owed by individuals at £1.457 trillion, roughly equivalent to one year's GDP. Consumer credit fell by £200m. Despite record low interest rates, fears of redundancy and uncertainty about the future seem to have fed a new aversion to debt.
Brian Murphy, head of lending at the Mortgage Advice Bureau, warned: "The hatches have been well and truly battened down. Consumers, it is clear, are retrenching like never before."
Anecdotal evidence suggests that consumers are using the reduction in their monthly mortgage bill to pay off their debt more quickly, rather than spending the windfall, as the Bank and the Government would wish.
Although new mortgage approvals rose again, to just over 51,000, the total value of mortgage lending fell back, as repayments exceeded new lending, suggesting protracted weakness in the housing market and that stabilisation in house prices may be linked to a shortage of supply rather than more fundamental strength of demand.
The Royal Institution of Chartered Surveyors' chief economist, Simon Rubinsohn, added: "The fundamental issue remains the withdrawal of many lenders from the mortgage market over the past year and the reluctance of new participants to play a meaningful role in delivering finance to potential homebuyers."
The Bank also reported a jump in bad debts, blunting claims that the banks are being unreasonable in their lending policies. Write-offs of corporate debt rose by £365m, or 40 per cent, in the second quarter compared with the first three months of the year: write-offs on household unsecured debt rose by £250m.
Such write-offs will further damage bank balance sheets and their ability to lend sufficiently freely to secure the recovery. Bank lending to firms fell by £14.8bn in July, partly a reflection of companies turning to bond and equity markets to raise funds.
The reduction in demand for funds threatens to stymie the Bank's attempts to get the economy moving by boosting the money supply by some £200bn. The Bank's favoured measure of monetary growth, which strips out lending between banks, showed a 0.6 per cent rise in July, with growth of 3.9 per cent over the year, an improvement over last month's figures but not rapid enough yet to guarantee strong GDP growth.
Experience in the UK and US in the 1930s and more recently in Japan suggests that once a deflationary psychology takes hold, it can be extremely difficult to counter.
There was also slightly discouraging news from the manufacturing sector, where the Markit/Chartered Institute for Purchasing and Supply's monthly survey of confidence and new orders fell back a little.
Rob Dobson, a senior economist at Markit, commented: "The recovery is likely to continue, but may become more muted later in the year once the initial rebound and monetary and fiscal stimuli have run their course."
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