Surging inflation is forcing consumers to borrow more and save less, suggest the latest money and credit figures.
Normally, a rise in consumer credit is a good indication that consumption is growing strongly because it tends to expand when the economy is good. People feel confident enough to borrow and splurge on big tickets items, such as cars.
However, this time may be different. A rise in consumer borrowing over the next year could be a sign that high inflation is driving consumers to maintain their lifestyles by borrowing. We know that retail sales volumes slumped in December, so it seems unlikely that the £0.8bn increase in consumer credit in December was down to consumers buying more goods.
Right now, household balance sheets are in a much stronger position than before the pandemic. Households paid off about £25bn of consumer credit and accrued excess savings of around £225bn.
There’s clear evidence that households are dipping into those savings, and borrowing more, to reduce the impact of surging inflation. Admittedly, the £0.8bn rise in consumer credit in December was smaller than the downwardly-revised £1bn increase in November, and below the average monthly rise of £1.2bn in the two years before the pandemic. But the annual growth rate for all consumer credit increased to 1.4% in December (from 0.8% in November), and households put £3.2bn into savings accounts in December – significantly below the 12-month average of £10.6bn, and even lower than the pre-pandemic average of about £5.5bn a month.
That’s one reason why the looming cost of living crunch won’t be as damaging to the economy as it would have been a few years ago, and why we still expect GDP growth to be 4.5% in 2022, despite the highest inflation in decades.
Housing market set to cool
Meanwhile, the housing market appears to be settling after the end of the stamp duty holiday in September. Approvals for house purchases ticked up from 67,659 in November to 71,015 in December. Mortgage rates will continue to rise over the coming months as lenders respond to the recent jump in the wholesale funding costs. As a result, house price growth is likely to moderate over the rest of the year from the whopping 11.2% y/y registered in January.
Finally, businesses continued to focus on paying down debt accumulated during the pandemic. Normally, a drop in business borrowing would be a bad sign for future investment, but since many firms raised excess amounts of finance during the pandemic it’s not surprising that they’re repaying some of it. Interest rates on new loans remained around 2%, but abundant liquidity remains in the market and access to credit is still very strong.