Scots most at risk under consumer credit bubble

Like the poor, it seems low interest rates and consumer debt bubbles are always with us.

So it’s hard not to feel a little sorry for Stuart Patrick, chief executive of Glasgow Chamber of Commerce, who caused a minor stushie over his complaint that the poor, in the shape of beggars, were putting people off visiting shops in Glasgow city centre. Well, the figures don’t appear to support Patrick’s argument, but he identified an issue many are concerned about — and offered a solution.

One wishes the Old Lady of Threadneedle Street could be as forthright about its current stance on household borrowing, an issue that indirectly has worrying implications for Scotland’s economy.

A decade of ultra-low interest rates has fuelled a worrying dependence on cheap borrowing. Against the backdrop of rising inflation — due to the fall in sterling and stagnant wage growth — Mark Carney, the Bank of England (BoE) governor, has often muttered hawkish concerns that consumers are increasingly vulnerable to falling behind, or defaulting on, their credit cards and personal loans.

Lending to households is certainly booming. Unsecured borrowing stands at £201bn, its highest level since the pre-crisis boom years, and up by about 10% in the past 12 months.

But while the sharp rise in consumer credit is firmly on the Old Lady’s radar, Carney and most members of the BoE’s monetary policy committee (MPC) want someone else to do the heavy lifting to address the problem. Last week’s six-to-two vote by the MPC to leave borrowing costs at 0.25% wasn’t a close-run thing. Indeed, in yet another volte-face, Carney last week dismissed risks posed by the rise in unsecured borrowing in the same breath as he downwardly revised GDP, wage growth and productivity — forecasts that, incidentally, still look optimistic.

Which is odd because earlier this year the Old Lady’s financial policy committee (FPC) slapped a demand for £11.4bn of extra reserves on big lenders in what was a clear — and likely forlorn — tightening measure.

The FPC, set up by George Osborne in 2011, is essentially the Old Lady’s raised eyebrow made flesh. But its actions are also monetary policy by the backdoor. Carney is banking on the FPC’s counter-cyclical buffer taking enough steam out of the credit boom to enable the MPC to hold interest rates at their current level, and not imperil current sluggish growth.

Yet, along with low interest rates, the bubble the FPC is trying to prick is also being inflated by the bank’s term funding scheme (TFS). The MPC did at least call time on TFS, through which the BoE throws cheap finance to banks to provide credit to customers, from next February, but not before it announced an additional £15bn for the scheme, bringing the total to £115bn.

Is this seemingly contradictory policy — one foot on the accelerator the other on the brake — a bad thing? A near-term rate rise would certainly contain the growing consumer credit bubble. It would push sterling higher, which would reduce inflation — which Carney reiterated will hit 3% this year. Moreover, a hike would merely reverse last August’s emergency post-Brexit referendum rate cut.

This issue is particularly pertinent to Scotland. We have much slower economic growth than most parts of the UK, but on average we have less unsecured debt.

However, the current level is rapidly rising here. A recent Bank of Scotland report revealed more than one in five Scots has no savings. It found 21% of us have failed to put any money away — up from 18% a year earlier — while almost 40% of Scots have savings of less than £2,500. The EY Item Club warned recently Scotland’s household savings ratio has plunged to a record low.

The problem, of course, is that consumption-led growth is the main driver of expansion at the moment, in Scotland and the rest of the UK.

Scottish government figures revealed last week that retail is one of the few areas posting growth on a par with the wider UK. Sales grew by 1.4% in the second quarter of 2017, only slightly below the 1.6% across the wider UK.

A rate rise to curb the growing consumer credit bubble would act as a further brake on Scotland’s sputtering growth and, bearing in mind the higher level of taxes Scots now pay, would have a greater impact here than on the wider UK. It would heap more pressure on Scottish households, raising the costs of mortgages and unsecured loans at a time when wage growth is in reverse and few have a personal buffer in savings.

The economist John McLaren summed up the issue as it relates to Scotland: “If the UK were suffering the same poor growth as Scotland over the past two years, the economic discussion would be very different,” he told me. “However, the Bank of England is able to avoid this difficult issue at present because the Scottish government doesn’t want to admit the Scottish economy has a problem, so exerts no pressure on the BoE to act.”

Like the poor, spinning politicians will always be with us, too.