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Borrowers Shrink


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What's going on?

According to data out on Monday, the amount borrowed by businesses and households in the UK in the previous year fell for the first time since mid-2013, perhaps reflecting the uncertain future of Britain’s economy.

What does this mean?

To some extent, this news is expected: late last year, British banks announced plans to begin scaling back their lending in some areas. Consumer credit had been expanding rapidly, leading to concerns that some people would be unable to meet repayments as interest rates slowly began to increase. That merits an interesting comparison to the US, where the level of consumer debt is still growing ($13 trillion at the last count!) despite a slow but steady rise in rates.

Borrowing by businesses in the UK is also declining, which many analysts attribute to companies reacting to the uncertainty surrounding Brexit by keeping their wallets closed.

Why should I care?

For markets: Less borrowing could mean interest rates remain lower for longer.

Economies typically grow more quickly when people and companies are borrowing more money (essentially because they then have more money to spend). This is, to some extent, what’s happening in the US right now – and it’s partly why the US Federal Reserve has raised its target interest rate numerous times. In the UK, however, a reduction in borrowing makes it less likely that the Bank of England will also increase interest rates (although there are other factors, like high inflation, that mean it may increase them anyway).

For you personally: Be careful with your savings, now…

Even though real incomes are being squeezed by inflation, Brits’ overall level of spending was about the same last year as the year before. But since consumer credit is contracting, that implies that they’re dipping into their savings to pay for that spending. While it’s often hard to tighten your belt, take care not to whittle away at your rainy day fund – wherever you are!

Originally posted as part of the Finimize daily email.

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