Slump in borrowing raises chances UK already in recession

Consumers are struggling and behaving more cautiously in the face of the impending recession, with many saving more and almost certainly reducing their total spending. 

The slump in consumer credit to £0.5bn in December, suggests that after a period of resilience, consumer spending may have weakened at the end of the year. This raises the chances that the economy contracted in Q4 and fell into recession. 

Admittedly, the slowdown in credit growth could reflect timing around Christmas spending. The overall fall in consumer credit was driven by £0.5 billion of repayments on credit cards, the first net repayment since December 2021, after a large jump in November. But we already know retail sales volumes were especially weak in December and the drop in borrowing suggests overall spending also dropped. There is now probably a 50:50 chance that GDP in December fell by the 0.4% needed to drag Q4 as a whole into the negative. 

What’s more, households deposited an additional £4.6 billion into savings accounts in December, compared to £5.6 billion in November and the average monthly net flow of £5.5 billion during the past six months. Although the amount of savings being deposited each month is falling, it still suggests that very weak consumer confidence is still prompting households to spend less and save more in anticipation of tough economic times ahead. With consumer confidence still near its record lows there seems little chance of consumers spending their savings pool anytime soon.

In December, households continued to stockpile cash at a faster-than-normal rate in response to fears of rising unemployment, higher interest rates and the recent decline in the value of their total financial assets. The stock of households’ savings is now £190 billion above the level it would have reached if they had continued to add to them at the 2018-to-19 average rate since January 2020. (See Chart.)

Higher interest rates hitting house purchases hard

Approvals for house purchases, an indicator of future borrowing, decreased significantly to 35,600 in December, the lowest since May 2020, from 46,200 in November and a peak of 74,425 in August. This dramatic slowdown in the housing market is due to the ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increasing by another 32 basis points to 3.67% in November. This is likely to continue to increase over the next few months leading to a further slump in new mortgage approvals and eventually to around a 10% drop in house prices.

However, there are three reasons why a house price slump should not be a huge concern to the market:

  1. the huge growth over the last two years;
  2. the strength of household balance sheets; and
  3. the tightness in the labour market.

Middle market borrowing remains subdued

There is evidence that businesses are exercising more caution in their borrowing decisions. UK non-financial businesses borrowed net £1.9bn in December. Within this, large non-financial businesses borrowed net £2.7 billion in December. But small and medium sized non-financial businesses (SMEs) repaid net £0.8 billion in December. However, in spite of this more cautious borrowing behaviour, our Q4 Middle Market Business report found that 44% of middle market businesses are planning to borrow more over the next six months.

Overall, it’s clear that consumers are still taking an extremely cautious approach to saving and borrowing despite the pressure on their living standards. Until consumer confidence improves significantly, which may not be until the second half of this year when real wages start to rise again, consumers are not likely to follow the example of those in the US and significantly run down their savings.