Consumer debt is a term that has been dominating the news of late, with countless warnings being cited. The Bank of England announced in July that unsecured consumer credit has risen to £200bn for the first time since 2008, and many are curious as to where this may lead and the negative consequences it may bring. In fact, the extraordinary rate of growth of UK consumer debt has become a ‘serious problem’ according to a group of the world’s leading experts in credit.
Nearly three quarters (74%) of the 200 credit control specialists questioned at the recent University of Edinburgh Business School’s biennial Credit Risk and Credit Scoring Conference said the Bank of England was right to be concerned about increasing levels of UK consumer debt.
Furthermore, two thirds (66%) predict another credit crunch is likely to happen by 2022 and more than a third (38%) believe a financial crisis could hit within the next three years. This view of our expert delegation at the conference echoed concerns that have been expressed in the Summer by the Bank of England about lenders being complacent about consumer lending levels. Having been reluctant to publicly commit to rate rises, it’s unlikely we’ll see any changes immediately. But reality may bite sooner than expected if lenders, concerned about a potential rise in customers defaulting, increase interest rates to help off-set the risk.
The question is, should borrowing levels continue unchecked due to ultra-low rates? Well, the vast majority of the experts (91%) expect an increase in the rate of UK consumers defaulting on repayments and 61% said tightening lending criteria would shore up financial stability over the next year. The situation appears to be more pronounced in Britain than overseas, as 46% of UK credit experts are concerned credit is too easily accessible in their own country while only 26% of those overseas hold similar concerns.
Unsurprisingly, Brexit was also top of the agenda when the credit world came together in Edinburgh. When asked about Britain’s exit from the EU, almost three quarters of the global finance specialists (73%) predicted the UK’s departure would harm consumer and businesses’ ability to obtain credit when they need it. The majority (83%) said the Eurozone would suffer significant aftershocks from Brexit, with 42% reporting these would still be felt beyond 2020.
There is overwhelming support for a soft Brexit as a means of keeping the economy in check – 52% said a soft Brexit would improve financial stability in the next 12 months compared to 6% for a hard Brexit. Given all eyes are on Brexit negotiations at the moment as trade talks continue. Moody’s has already warned the UK could be looking at a credit downgrade if negotiations fail to get the right sort of deal. The simple truth is this situation is unprecedented and we need talks to progress further before we can better predict what will happen. For now, the global experts who gathered at the University of Edinburgh earlier in the month are clear that we’ll be feeling the effects of our departure from the EU for years, perhaps decades, to come.
Article by Jonathan Crook, Professor of Business Economics and Director of the Credit Research Centre at the University of Edinburgh Business School.