Despite the economic uncertainty brought about by the Brexit vote and the lack of clarity as to what the final terms may be, the British public is still happily spending.
Confusion reigns among city analysts who had predicted gloom and doom and a sharp slowdown if the nation voted to leave the European Union. Yet the near 2% growth rate currently forecasted by Mark Carney, Governor of the Bank of England would see the UK in the top rank of developed world nations.
A recent report from PwC paints a similarly optimistic picture, predicting that with potential average annual growth of around 1.9%, the UK could be the fastest growing economy in the G7 over the whole period to 2050.
The UK’s position is sustained by its relatively larger projected working-age share of the population than in most other advanced economies. However, this growth potential depends on the country remaining open to talented people from around the world after Brexit.
In fact with the development of China, Indonesia and India as economic powers PwC predict that the EU27’s share of world GDP could fall to below 10% by 2050, with France out of the top 10 and Italy out of the top 20
John Hawksworth, chief economist at PwC, said:
“After a year of major political shocks with the Brexit vote and the election of President Trump, it might seem brave to opine on economic prospects for 2017, let alone 2050. But a long-term view is crucial for considering areas like pensions, healthcare, energy and climate change, housing, transport and other infrastructure investment. By looking beyond unpredictable short-term economic and political cycles and focusing on fundamentals, long-term growth projections can actually be more reliable than short-term forecasts.”
This optimistic trend is great news for industry, particularly the automotive sector as new car sales surge. The home improvement and construction sectors are benefitting too as householders splurge on extensions and home improvements while even the high street is showing a marked up turn.
Increased consumer confidence thanks to high employment rates, modest increases in pay and lower prices at the petrol pumps and supermarket check outs has boosted households’ willingness to spend, and we certainly are, on cars, household goods and in local shops and major chains alike.
Much of the growth is fuelled by an increase in household debt; a 9.3 % rise in borrowing in February, the fastest pace since 2005, has resulted in households owing £63.3billion on credit cards and £115.3billion in other loans excluding mortgages.
The automotive industry in particular is feeling the bounce, car sales on finance have never been this high – they rose by 22% in just one year alone, and the number of new cars bought with cash borrowed at dealerships surged above one million in the past year. In excess of £28billion was borrowed – more than twice as much as just four years earlier.
Rising numbers of households are taking advantage of the record low rates for home improvements, major purchases or debt consolidation. Personal loan rates have fallen markedly over recent years, the average rate on a £10,000 personal loan is now at a record low of 4.3 per cent – or 3.43 if taken out from a supermarket.
Credit is easier to get too, credit scoring criteria has loosened in 11 of the past 12 quarters, which means a higher number of households and businesses have access to cheap cash, and alternative sources of funding. We are not back to pre-crash levels of debt yet, but this level of borrowing and the happy assumption that low interest rates are here to stay presents the Bank of England with a problem. With the economy’s growth being sustained by the rise in consumer spending fuelled by cheap credit, the economy is especially vulnerable from any rise in interest rates.
High levels of debt make it harder for the Bank to raise interest rates, because households and businesses could start to struggle as the cost of servicing debts rises, not just for unsecured borrowing but mortgage debts as well.
Governor Mark Carney has said in the past that the concern is not that households and businesses would stop paying their mortgages and other debts, but that covering these costs would eat into a greater proportion of people’s disposable incomes leaving them with less to spend elsewhere.
This may well be where business starts to feel extra pressure, not just in a falling off of demand but in increased loan repayments and pressure for higher wages including an increase in pension contributions.