Small rise in borrowing unlikely to boost spending

The latest money and credit figures provide some encouragement that consumer spending picked up in August, but credit growth was still well below its pre-crisis average. 

Thanks to the weak retail sales data released last week, the small rise in borrowing won’t be enough to ease mounting concerns that the economic recovery is running out of steam. This means that rates may not rise as far or as quickly as the market expects, even if the Monetary Policy Committee (MPC) does hike them early next year. 

Consumers borrowed £0.4bn in consumer credit in August, the second largest amount since the pandemic began. This was split equally between credit cards and other forms of finance, such as loans and car finance. It was still well below the average of £1.2bn a month of consumer credit which was borrowed before the pandemic. 

Of course, this could be because consumers are using savings to fund spending they would once have funded with borrowing but households added another £9bn of cash to their holdings in August, which suggests they aren’t running savings down. At the same time, additional borrowing may be discouraged by the effective rate on new personal loans rising to almost 6%, the highest level since March 2020.

Meanwhile, there were more signs that the end of the stamp duty holiday was starting to cool the housing market. Approvals for house purchases ticked down in August to 74,500 from 75,100 in July. This is the lowest since July 2020, but is still  above pre-February 2020 levels. 

And there was further evidence that businesses are focusing on paying down debt accumulated during the pandemic. Large businesses continued the repayments they had been making for much of last year, and the £1bn net repayment by small and medium sized firms in August was the joint largest on record. More worrying was the rise in the average cost of new borrowing from banks by all private non-financial companies, which increased by 0.5 percentage points basis points to 2.3% in August. The recent jump in interest rate expectations suggests that the cost of borrowing will increase again in September, adding to companies’ cost burden. 

Overall, today’s data paint a picture of subdued borrowing for spending by consumers, which doesn’t suggest that consumer spending drove a massive rebound in GDP growth in August after the meagre 0.1% month-on-month rise in July. And with energy price hikes, tax rises and higher fuel costs all eating into household disposable income, consumer spending may be about 1% lower in 2022 than we had previously thought. 

Before it tightens monetary policy and adds an interest rate hike to households’ burden, the MPC should pause and consider how the labour market and the economy more generally are reacting to these latest disruptions.