AS THE UK economy recovers, some have begun to fear an emerging unsecured credit boom. Total unsecured borrowing has indeed risen by 4 per cent in 2013 to £216bn, the first increase since the financial crisis. But this is not the full story. Our analysis shows that almost all the £8.5bn increase is made up of a huge rise in student debt.
Stripping out student debt, underlying unsecured lending (which tends to fund consumption) has remained flat in 2013, at an average of around £5,900 per household. This means that average underlying household unsecured debt has fallen by around 25 per cent since the start of the financial crisis in 2008. Taken together, traditional forms of borrowing like credit cards, personal loans and overdrafts fell by 1 per cent in 2013. While newer forms of borrowing like payday and peer-to-peer grew by around 14 per cent in 2013, they still only represent around 1 per cent of total unsecured debt.
The situation is not entirely benign. Our annual credit confidence survey reveals that more than a quarter of people remain worried about their ability to meet repayments in future, with 34 per cent expecting their pay to be frozen in the year ahead. But the intention to save is at its highest since 2008. Despite the improving economic outlook, this seems to suggest we remain committed to paying off debt and saving more.
This is both good and bad news for the UK economy, depending on how we look at it. On the one hand, it is positive that consumers are putting themselves on a more sustainable footing and are finally starting to plan for the future. However, for retailers, which in the run up to the crisis enjoyed the benefits of rapid debt-fuelled growth in retail sales, this reluctance to borrow may not be such good news. The shift in behaviour will also have a significant impact on lenders. With the supply of unsecured lending potentially outstripping demand, we would expect to see reductions in margins, as competition for a more limited pool of borrowing increases.
But what of those high borrowing graduates? The massive increase in student borrowing could have long-term implications for the economy, despite the favourable terms on which student loans are provided. We estimate that, on average, students who started university in 2012 will graduate with around £40,000 to £50,000 in debt, with the average size of a student loan having increased by around 2000 per cent since the early 1990s.
This heavy debt burden, coupled with falling salaries for graduates and the fact that house prices continue to rise well ahead of earnings, could further contribute to the erosion of the UK’s home ownership culture. Graduates may delay, or struggle to get on to the property ladder at all, as we breed a new generation of long-term renters. But the challenges for the economy are not confined to housing. New graduates may be reluctant or unable to take on further unsecured credit, which will start to shift traditional consumption patterns and could leave retailers short-changed.
Simon Westcott is financial services director and consumer debt expert at PwC.