Consumer credit increased by just £834m in December according to data released by the Bank of England this morning. This was the smallest monthly rise since December 2000 and casts fresh doubt on the strength of retail spending in the run up to Christmas. The weakness of the figure appears to suggest that the BRC’s downbeat assessment of trading conditions during the month may have been closer to the mark than the more bullish tone of the official numbers.
We would not overplay this point. Although net consumer credit only rose modestly, the gross figure was more resilient. It also fell in comparison with November but by a more modest £164m. In effect, consumers continued to borrow fairly heavily during December but, for some reason, chose to repay a larger amount of outstanding debt than is typical.
One possible explanation for this could be the substitution of unsecured for secured borrowing. But lending secured on dwellings was also relatively weak during the month slipping to its lowest level since March last year. Moreover the remortgaging element of this was quite subdued in December. This is consistent with our own analysis which suggests that equity withdrawal in December may have been weaker than any point since the middle of 2002. On this basis, it is difficult to use the debt consolidation argument as a justification for the steep decline in net consumer credit.
Interestingly, the number of mortgage approvals remained at a reasonably healthy level and indicates that the property market is likely to remain buoyant over the coming months. This ties in with the report from the Nationwide Building Society yesterday which highlighted the fact that the low level of mortgage rates is keeping housing, in general, relatively affordable.
The latest data shows that total debt outstanding now stands at around 124 per cent of household disposable income. This compares with just ninety per cent at the start of 1998. Of greater relevance for the time being, interest servicing costs are currently just seven per cent of disposable income which is at the very bottom end of the range they have fluctuated within over the past fifteen years.
The moderation in the pace of debt accumulation in December is an interesting development ahead of next week’s meeting of the Monetary Policy Committee. At recent meetings Andrew Large expressed particular concern at the ‘continuing strong growth of household debt’ and voted alone in both December and January to raise base rates to four per cent to slow this trend. Given the stream of other positive economic news over the past fortnight, the weakening trend, especially in the consumer credit numbers, is unlikely to be of a sufficient magnitude to encourage him to switch sides.
Indeed, having felt at one point that the MPC could keep its foot off the break pedal for a while longer, we suspect that most other members of the Committee will join Andrew Large in supporting a modest tightening in policy next week. That said, with underlying inflationary pressures still subdued interest rates are only likely to increase in a modest fashion over the course of this year. Our end year target is 4.5 per cent.
