Debt isn’t new, and neither are the warnings about how dangerous it is to accrue it. In a recent book reviewed by MT, former FSA chairman Adair Turner pointed his finger squarely at household debt as the root of our recent economic woes. Relying on excessive personal borrowing is like building a house on sand – so beware the storm.
It’s reassuring then to hear Bank of England governor Mark Carney saying ‘this is not a debt-fuelled recovery’. Speaking at the French central bank, he said it was instead an ‘indirect’ threat to the economy. ‘Of course, that could change and it is still relatively high for the household sector... vigilance is required - it is always required.’
Indeed. Despite dipping since the crash, household debt is expected to rise steadily over the next few years back to pre-crash levels – both as a result of bigger mortgages and higher non-mortgage debt, which rose 42% in the last six months according to research from Aviva.
Household debt levels are expected to rise. Source: OBR
Are we looking at 2021 as the release date for The Financial Crisis 2: The Sequel, then? Thankfully, some lessons appear to have been learned.
Lending rules and asset requirements for banks have left the financial system far more resilient to shocks than before, which could dampen the effects of a downturn on a debt-laden economy. Just as importantly, debt is now more evenly spread – according to the latest ONS quarterly bulletin, the share of households with very high debt-to-income ratios (and therefore the greatest risk of defaulting) has fallen since 2012 back to 1990s levels.
Such developments are all very good, but they don’t sever the essential link between high household debt and economic risk. The bigger question is whether or not the debt will indeed rise as predicted. As can be seen above, the OBR has revised its forecasts substantially downwards, as the outlook for the global economy becomes more and more uncertain (thank you, China?).
Of course, debt doesn’t have to be a bad thing. When used by businesses to invest in capital, it is essential to growth. The problem, as a forthcoming MT feature will say, is that too much of our investments are in property, where it adds essentiall nothing to the economy. Until that changes, it will be hard to see growth in income outstripping growth in mortgages – and that’s not something anyone wants to see, central banker or otherwise.