Consumer Debt Repayment At Record High Amid Fears Of Unemployment

(Reuters) – THE SCALE OF BRITONS’ BELT-TIGHTENING was laid bare today by data showing record consumer credit repayments in August and a five-year high in households’ savings ratio in the second quarter.

Official data confirmed the economy suffered its worst 12 months since modern records began in 1955, with output falling by 5.5% year-on-year in Q2.

Faced with a growing risk of unemployment, households reduced debt levels and increased savings — as well as finding it harder to access cheap loan deals.

But economists focussed on a more positive outlook ahead, with most expecting a hesitant return to GDP growth in the third quarter amid signs that the economy has passed its low-point.

The Confederation of British Industry’s September retail survey reported the first sales growth since April, which analysts had viewed as a blip caused by the late timing of Easter, while August mortgage lending was much better than expected and its highest since February.

‘The September CBI survey lifts hopes that retail sales are holding up pretty well after losing momentum in August. This is important to overall growth prospects given that consumer spending accounts for some 65% of GDP,’ said Howard Archer, economist at IHS Global Insight.

The positive news from the CBI came despite data from the Bank of England which showed consumers repaid a record net £309 million of unsecured debt — mostly credit card balances — trumping the £259 million record set in July.

This chimed with figures from the Office for National Statistics which showed the household savings rate rose to 5.6% in Q2 from 3.9% in the first three months of the year, its highest since late 2003 and further evidence that the credit boom earlier in the decade is now long gone.

Nonetheless, Bank figures showed growing signs of a turnaround in mortgage finance — a precondition for sustaining tentative rises in house prices, which boost consumer confidence and some types of retail spending.

The number of mortgage approvals slipped fractionally in August to 52,317 but remained close to July’s upwardly-revised 52,404, the highest since April 2008. Net mortgage lending rose by £1.009 billion, the biggest rise since February.

But evidence the Bank of England’s £175 billion quantitative easing policy (printing money to buy assets and boost the economy) was increasing the broad money supply as intended, remained elusive.

The Bank’s preferred measure rose just 0.2% in August after a 0.4% rise in July.

‘There is still enough in this report to keep the MPC concerned about money and credit growth. And although we expect nominal GDP growth to recover in Q3, the current pace is still a far cry from the near 5% trend in nominal demand the MPC wants to see,’ said Allan Monks, UK economist at JP Morgan.

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