Greg Wright: Get a grip on runaway credit or we face a second crash

Our economy resembles an Olympic athlete who has been force fed junk food and strapped to the sofa, but still manages to trot across the line ahead of the field, despite stopping for a quick pint half way around the track.

The UK has achieved remarkable levels of growth in the face of Brexit uncertainty, chronic skills shortages, sluggish digital infrastructure investment and the lack of a coherent transport policy.

This is a testament to the sheer bloody-minded resilience of business people, particularly those who have had the guts to establish micro-businesses at a time when the political world is in a semi-permanent state of flux.

But too much of this growth has been fuelled by consumption and a rise in personal debt. While our attention is focused on Brexit, we could be sleepwalking towards another financial disaster.

Terrible borrowing decisions were behind the crash of 2008, and there are no signs that lessons have been learned. At some point, interest rates must go up; and the pain will be felt by over-stretched consumers, and ultimately, by us all.

The Bank of England has already warned that the rapid rise in consumer debt, which has been driven by interest-free credit cards, could pose a risk to the UK financial system.

The Bank’s Financial Policy Committee (FPC) made the sensible, if perhaps belated, observation that the surge in consumer borrowing may leave banks exposed if their lending rules are too loose and people cannot make their repayments.

Consumer credit recorded its fastest expansion for 11 years in November, achieving an annual growth rate of 10.9 per cent. Although this has eased back in recent months, the FPC noted in March that an “easing in credit supply conditions” had boosted consumer credit growth, including “the gradual extension of interest-free periods on credit card balance transfer offers”.

Last year’s jump in consumer borrowing was driven by credit cards and personal loans, but a growth in car finance was also a cause for concern. Many commentators have been alarmed by the popularity of complex car loans, known as personal contract purchases (PCP). Consumers may be taking out these loans without understanding the risks. It’s a horribly familiar story.

“The UK economy is looking increasingly fragile,” said Iain Clacher, an associate professor at Leeds University Business School. “Credit has remained too cheap for too long.”

All of this lending – some of which is downright reckless in my opinion – is underpinned by record low interest rates. However, as inflation rises above target, the Bank of England will have to increase interest rates, and the proverbial chickens will come home to roost.

As Professor Clacher observed: “Ultimately, there isn’t a lot of slack in an economy that requires such low interest rates, and for those who are just making ends meet, any increase in interest rates will be catastrophic.”

Jonathan Oxley, chairman of the Institute of Directors in Yorkshire and the Humber, believes that business borrowers remain cautious and business lending criteria, on the whole, are still tight. “Consumer debt appears to be different,” Mr Oxley said. “If consumers are hoping that wages are going to rise so that they can repay debt, or that inflation is going erode their debt, I think they are going to be disappointed.”

Just last week, Chancellor Philip Hammond said that Britain was weary after seven years of hard slog repairing the damage of the great recession. His comments underline the importance of preventing another unsustainable lending boom.

The FPC said that underwriting standards should be monitored closely. I couldn’t agree more. The Bank should have used much stronger language and threatened to throw the book at lenders who behave irresponsibly.

What happens, dare I ask, if borrowers default on a vast scale? We will hop in a time machine and head back to 2008. We will face seismic economic shocks and in which the poor suffer the most. The austerity that followed the last financial crisis caused misery for people who were not responsible for causing the chaos.

A study from the Bradford-based debt charity Christians Against Poverty found that arrears on household bills and other priority debts had tripled in the past decade for those at the lower end of the economic ladder. A decade ago, their average client owed £1,412 in priority arrears, representing just nine per cent of that person’s whole debt problem. In 2016, it had ballooned to £4,582, nearly a third (32 per cent) of the whole.

I have a simple plea to policy-makers. Carry out a root and branch review of consumer lending in Britain, and if necessary, discipline lenders preying on the vulnerable. A failure to act will be an abdication of responsibility. If you listen carefully, you might hear the sound of stable doors being slammed shut, as hoofs clatter away into the night.

Greg Wright is the deputy business editor of The Yorkshire Post.