Mark Carney said that we are not in a consumer debt bubble – is he right?
The British economy is overly dependent on the consumer. We stopped making things and started buying and selling them in the 1980s. It is Margaret Thatcher’s legacy.
But this does not mean we are in a consumer bubble.
An economic or investment bubble describes a rapid surge in asset prices fuelled by irrationally exuberant behaviour. It is unwarranted by fundamentals and is unsustainable, inevitably collapsing under its own weight.
Yes, retail sales are rising faster than might be expected, given that wages are rising more slowly than prices. Yes, people are taking advantage of cheap money to buy consumer goods they don’t need. And yes, banks are forgetting the lessons of the past, encouraged to lend by a contradictory central bank which wrings its hands while at the same time providing cheap money.
But a bubble is fuelled by over-optimism. And there is little of that about. I expect the consumer can afford to keep grudgingly spending for a while yet.
Read more: Mark Carney: An interest rate rise is coming
What was Mark Carney supposed to say? You cannot seriously expect him to drop the B-bomb!
Call it what you want, judging from the number of warnings that have been issued by the Bank of England in recent months, the alarm bells are definitely ringing.
Consumer credit has grown by around 10 per cent in the 12 months to July 2017 – something we haven’t seen since the financial crisis. It continues to outgrow increases in household income, which have been slowing since the start of 2014.
There is no end in sight, and affordability for many people will continue to be squeezed even further.
We are probably not steering towards a sudden 2008-style implosion of our entire economy – many people who take out credit today can still very well afford it.
But with the system fuelling the over-indebtedness especially of young, low income families, there is no way around the fact that consumer credit is heading in the wrong direction, fast.