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Is there a consumer debt bubble and is it about to burst?

What this means for businesses

Consumer spending drives the economy and in the UK is the largest component of total UK expenditure, accounting for 63% in 2018.

Household expenditure increases, however, are being driven by households taking on more debt. In 2007 the average UK household owed £11,000 in debt excluding mortgages. This has now risen in real terms to £15,385 according to the Trade Unions Congress.

At the same time there has been a dramatic increase in popularity of quick and easy to access credit, such as pay day loans. The Office of Fair Trading estimated the industry to be worth £900m in 2006 but in the year to 30 June 2018 £1.3bn was borrowed in payday loans. It is not just pay day loans that have experienced a sharp increase in popularity as other easy access credit methods are being used such as Buy Now Pay Later and in some cases people are resorting to loan sharks.

The Financial Conduct Authority have been taking action against providers of credit, particularly those providing credit to vulnerable individuals and this has seen:

  • A number of pay day lenders enter into Insolvency due to FCA imposed affordability checks and capped pay day loan charges.
  • Recently it was announced that banks will be forced to suspend credit cards for those in persistent debt.
  • Short term overdraft fees are rising to around 40-50% interest
  • The FCA may take action against Buy Now Pay Later providers which apply similar credit searches to pay day lenders prior to FCA intervention.

It is likely to become increasing difficult for consumers to gain access to these forms of credit due to supply being restricted or charges increasing. Individuals experiencing substantial levels of household debt may be unable to gain access to funds to service debt and ongoing lifestyle. Personal insolvencies are now at a nine year high and it would not be surprising given the levels of household debt if this figure was to increase.

Finally, consumer trends are shifting from spending to saving; a survey from Fidelity Investments of 3,000 adults aged 18 and up suggested that the top New Year’s resolutions were to pay down debt (51%) and to save more (53%). Granted this survey was in American but it would not be surprising to see similar trends in the UK.

If there is a fall in consumer spending in 2020 given that this accounts for a majority of UK GDP this could play a huge factor in economic growth for the year.

What can businesses do?

This is a difficult question to answer as consumer debt and consumer spending are wider macroeconomic factors that businesses cannot control.

Business to consumer industries will be directly affected by this especially if consumers do look to put more resources into paying off debt, therefore spending less. Other businesses could be indirectly affected if the overall level of consumer spending falls due to its wider impact on economic growth.

I think this highlights the need for businesses to be proactive and always taking steps to improve sales and profitability to ensure their viability for the long term.

FEATURING: Scott Bebbington
Scott joined Francis Clark Business Recovery as a trainee in 2012 having previously graduated from Cardiff University. He qualified as a Chartered Accountant in 2016.… read more
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