If the cost of borrowing increases, how will UK consumers cope?

This blog is by Frank Hammerton, the Business Development Director of Teleperformance Collections.

The UK is experiencing a boom in consumer debt and increasing house prices. It sounds like we are back in the roaring noughties before the lines of customers formed outside branches of Northern Rock in 2007, scared that the bank would collapse before they could withdraw their deposits.

Economists are now getting concerned that Britain is starting to recover from the depths of the economic crisis in a way that is not going to be sustainable. On the surface it does look like good news that house prices are soaring to record levels and consumer spending is on the increase, but this cannot go on forever.

Speaking to Reuters Jonathan Portes, director of the National Institute of Economic and Social Research, said: “What we would worry (about) is that we are getting an unbalanced recovery, it could be sustainable in the sense that growth could go on for a year or two, but over the medium term it would not be what we need.”

The medium term is important. Right now we are seeing record house prices that look like there never was a crash, yet young borrowers are finding it harder than ever to get on the property ladder.

Savers are penalised with record low interest rates and the same low rates mean that large unsecured loans – such as with credit cards – can be serviced relatively cheaply.

Confidence remains fragile, with many people still forgoing annual wage increases, preferring the security of a job paying less than no job at all.

In the midst of all these difficulties the new governor of the Bank of England needs to plot a path for the medium to long term. If he starts raising interest rates then many of those people who are earning less, but borrowing more will start struggling.

At some point it is bound to happen. What can we do in the meantime to ready ourselves for when borrowing costs start to increase again?

Pound coins

 

Photo by JD Mack licensed under Creative Commons

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