Why the consumer is no longer king

 
Allister Heath
WHY are so many people still in denial? The era of debt-fuelled spending, from the private and the public sector, is over. A crisis caused by excessive and underpriced debt cannot be resolved by borrowing even more. It is a simple proposition. Virtually all companies, many individuals and some governments now understand this – but many others just don’t get it. The British economy is smaller than it was three years ago, so the private and public sectors both have to tighten their belts. We can’t go on spending and consuming more than we are producing forever. Down that road lies national bankruptcy.

In the two decades to 2007, borrowing by UK firms and households rose 11 per cent a year, more than twice the growth of the whole economy, according to Deloitte. At first, this made sense: credit can be a good thing when taken in sensible doses. Even respectable people in steady jobs once found it hard to get a mortgage, or a credit card, making it hard for them to spread spending over their lifetimes. Yet we went from a situation of too little leverage in the early 1980s to one of excessive debt by the early 2000s, and eventually to an orgy of demented leverage by 2006-07.

Over the next few years, growth in overall bank credit will run at a fraction of the rates seen in the previous two decades – and a good thing too. There will be less demand for debt – but also less supply, with banks having to hold much greater and more liquid capital reserves. The price of borrowing – especially for unsecured loans such as credit cards or overdrafts – will be permanently higher and better reflect real risks. The challenge will be to maintain the recovery without large injections of credit. This is especially true of consumer and government borrowing. Corporate credit was a problem at the height of the bubble, when mega-private equity deals were being financed with oodles of debt. It is much less of an issue today. Firms have slashed their reliance on bank debt aggressively since the start of the downturn, relying instead on internally generated funds, equity raising and corporate bond markets. American companies have cut levels of bank debt by 22 per cent and UK companies by 18 per cent, according to Deloitte.

Reduced growth in consumer credit will end the boom in retail sales and leisure spending of the past few years; total volumes will keep on growing but at a slower rate than GDP. In the long-term, this will be a good thing as it will help rebalance the economy: we need more savings and investment, and a greater emphasis on export-driven-private sector growth – and less private and public consumption as a share of GDP. In the short-term, however, it will be painful. Today’s figures from the British Retail Consortium – total retail sales rose just 1.1 per cent and like-for-like sales fell 0.4 per cent in February on a year ago – confirm that the great retail bonanza is over (though of course surging living and petrol costs and inflation are the other key drivers of the slowdown, having slashed real disposable income).

The British consumer’s credit card is maxed out, as is the government’s. The UK’s only hope is that the private sector starts to invest again – the corporate capital stocks are in need of refreshing after the cutbacks of recent years – and is able to sell its wares abroad. Hoping for a domestic consumer-led recovery is pointless.

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allister.heath@cityam.com