Unexpected UK household borrowing growth a ‘double-edged sword’

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Strong household borrowing figures for May suggest consumer spending may have picked up in Q2, but add to concerns about household debt, say Capital Economics.

Unsecured consumer credit growth rose £1.7bn, up from April’s £1.5bn and well above consensus expectations of £1.4bn.

Capital Economics UK economist Ruth Gregory says the figures were “unexpectedly strong”.

Car finance in particularly grew particularly rapidly.

“The rise in borrowing growth is something of a double-edged sword. On the one hand, the fact that households are confident enough to continue to borrow more despite Brexit concerns suggests that they think that higher inflation will provide just a temporary squeeze on their incomes,” Gregory says.

But she adds that policymakers are already concerned about rapid increases in lending as the ratio of debt to disposable income has risen “significantly over recent quarters”.

The figures strengthen the case for the financial policy committee to raise the amount of capital banks are required to hold against their unsecured loan book.

“Admittedly, a tightening in credit standards for consumer borrowing could exacerbate the recent slowdown in consumer spending growth,” Gregory says.

“That said, if inflation falls and nominal pay growth picks up next year as we expect, this should pave the way for more sustainable spending growth ahead. And while tighter regulation could lead to a gradual slowdown in credit growth, it could reduce the risk of a more abrupt adjustment.”