Consumer spending recovery under threat

The strength of October’s consumer borrowing adds to evidence that households were a bit more willing to go out and spend last month. However, this could just be down to earlier Christmas shopping, so spending may weaken in December. That means the bigger question is whether the emergence of the Omicron variant causes consumers to retreat over the winter.

Consumer credit borrowing hit £0.7bn in October, driven by a £0.6bn increase in credit card debt. And although this was still well below the pre-pandemic average of £1.2bn a month, it was its fastest growth rate since July 2020. What’s more, households seem to be saving less. They added another £5.5bn of cash to their holdings in October, well below the six-month average of £8.8bn. Combined with strong retail sales, it suggests that consumers were a bit more willing to get out and spend last month.

Meanwhile, there was further evidence that the end of the stamp duty holiday is starting to cool the housing market. Approvals for house purchases dropped from 71,851 in September to 67,199 in October. This is the lowest since July 2020, and is in line with pre-February 2020 levels. Mortgage rates will rise sharply over the coming months as lenders respond to the recent jump in the wholesale funding costs. The pressure on households’ incomes will build as CPI inflation rises further and taxes increase in April. This means that housing sales will probably continue falling.

Finally, businesses continued to focus on paying down debt accumulated during the pandemic. Normally, a fall 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 steady, despite the surge in interest rate expectations, and that’s a good reminder that abundant liquidity remains in the market and access to credit is still very strong.

The overall impression from today’s data is that consumers were a bit more enthusiastic about spending last month. Of course, this enthusiasm for spending may not last if it’s just due to early Christmas shopping or the Omicron variant causes people to become more cautious. And high inflation will still eating into household’s disposable incomes. For now, however, the economy has a little more momentum going into the winter than expected.


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