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Is the current consumer debt boom a bubble waiting to burst?

Jonny Clark

11th January 2018

As questions on the causes of the Financial Crash of 2007/08 and subsequent policies to avoid a repeat may well appear on this summer's Economics exams, I was intrigued to read this report in the Telegraph, highlighting the research of the Bank of England into the current consumer debt boom.

The report from the BoE suggests that, whereas the last Financial Crash was started by huge swaths of 'sub-prime' debt that couldn't be paid off and almost lead to the collapse of the banking system, debt growth in the UK at the moment appears to belong primarily to those with high credit ratings (i.e. those least at risk from defaulting on payments).

The suggestion is that some of the debt growth comes from the rise of zero-interest credit cards and relatively cheap motor finance deals.  Such credit arrangements have primarily been made with those who are less likely to default as they may have well-paid stable employment or sufficient monetary reserves.

The inference from the report then is that, whilst debt rates are reaching a level similar to 2007 in the UK (growth in unsecured debts was up by 9% in 2017), the economy is less at risk from a bursting bubble.

An interesting footnote to these figures is that further data into who is borrowing is yet to be released.  What we don't know is whether the borrowing boom is being driven by well paid workers generally or a new generation of young people who are unable to afford housing so are using their money to consume in a different way.  As such, this change in borrowing may have a knock-on effect in the housing market which, in itself, could have some negative consequences.

Jonny Clark

Jon Clark has been teaching economics and business studies for over 25 years primarily in the Further Education sector. Before joining tutor2u, he was a senior manager at South Cheshire College in Crewe.

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