This timebomb could be much more dangerous than Brexit

This timebomb could be much more dangerous than Brexit

It’s almost nine months since Britain voted to leave the EU. Yet despite some of the dire predictions about what would befall the country, it’s still here. What’s more, it still appears to be doing fine.

The economy has continued to expand. Granted, some of the data have been variable, while sterling has tumbled since the referendum. But even this has provided a silver lining, both by boosting exports and by making UK assets cheaper for foreign buyers. Although Brexit uncertainties remain, the dole queues are shortening and growth forecasts have been upped.

As I’ve written before, don’t be freaked about Brexit.

No, the country’s real problem lies elsewhere. It’s a ticking timebomb. And there’s a risk that it could explode under the whole economy…

Grotesque global borrowing

Our economy is completely based on debt. And perhaps the scariest aspect is that nowadays we fully accept this. Without mortgages, loans, credit cards, corporate bonds and indeed vast government borrowing, Britain would fall apart. As would most other countries.

In fact the world has become a total debt junkie.

Total global debt has now exceeded 325% of GDP, according to IIF’s most recent quarterly report. With sovereign borrowing rising sharply in 2016, global debt across all sectors—household, general government, financial and non-financial corporate—increased by more than $11 trillion in the first three quarters of 2016 and now tops $217 trillion.

These are terrifying numbers. If you’re a Strategic Intelligence subscriber, of course, you’ll know all about them. Jim Rickards, my colleague at SI, has written about them several times.

But here in the UK, there’s a very specific debt problem. I’m not even referring to our government’s huge debt. Nor am I talking about the rise in mortgage borrowing to pay for increasingly ridiculous house prices, which is a topic I’ll address another day.

More immediate – and getting worse faster than the expansion in home loans – UK consumer credit is surging out of control once again.

The Bank of England doesn’t exactly have the best forecasting track record. But it’s very good at number crunching. I’ve been poring over the Bank’s consumer credit stats (I know, but someone has to do it!). And these are showing something very alarming.

Britain’s consumer debt descent

Over the 12 months to end-January 2017, UK net consumer credit excluding student loans grew at 10.3%. It’s been increasing at an annualised rate of more than 10% since June 2016. That’s the fastest expansion rate since the end of 2005, in other words from just before the last great financial crisis.

At that time inflation was higher, which devalued the debt in real terms. In January this year, though, UK average earnings rose by just 2.2% on an annualised basis. So borrowings are expanding several times faster than pay packets.

Indeed, according to new research from MoneySuperMarket, the average amount owed per adult in loans, bank overdrafts or credit cards is growing this year by almost £300 to £6,372.

New data from the latest Financial Wellness Index, compiled by financial services firm Momentum UK, show the extent of Britons’ descent into debt. In the last year around 1m people have increased the amount they owe on an overdraft or credit card. And 4.5m have used alternative credit (including high-cost/informal loans) while some 4m have had to borrow money from friends or family.

So the latest warning from independent Office of Budget Responsibility (OBR), which churns out the Chancellor’s Budget numbers and forecasts, is no surprise. It says that Britain’s economy is being kept afloat by an “unsustainable” spending splurge.

Granted, UK inflation is on the rise again. But that is squeezing incomes even harder. As a result of this and the country’s borrowing binge, the ‘savings ratio’ – the percentage of pay that’s saved up – is going negative for the first time since the middle of 2008, says the OBR. In turn, households are poised to increase their total debt to 153% of disposable income by 2022, up from the already-high level of 149% shown in the OBR’s November forecast.

It may still take time for Britain’s borrowing boom to unravel. But it’s a timebomb waiting to explode. Remember, household spending accounts for nearly two-thirds of total UK output. Current debt trends just aren’t sustainable. The country can’t keep spending beyond its means on credit cards and via raiding savings unless there’s a pick-up in productivity. Again that’s a subject for another day, but it’s certainly not happening at the moment.

What’s more – the elephant(s) in the room – interest rates will go up again at some stage. That will make it even harder for borrowers to make their repayments.

When the stock market cottons onto the full risks of Britain’s looming consumer debt crisis, there could be a very nasty shakeout. In fact, I believe that a sell-off in equities is overdue anyway. Strategic Intelligence readers will be kept fully up-to-speed with developments. If you’re not already a subscriber, now could be a very good time to start.