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UK Debt Exceeds GDP

New research suggests that a record number of households in Britain are facing serious debt repayment problems. Indeed, Britons owe more money than the economy can generate in a year.

This news was accompanied by a warning from mortgage lender Nationwide saying that house prices look set to suffer a sharp fall next year, back into line with inflation, as the credit crunch begins to hit Britain hard.

Already the United States is looking at a severe downturn in consumer spending, and Britain looks as though it will follow suit as household finances have reached their limit. The research from Grant Thornton, accountants, suggests that the total amount of consumer debt owed by families in Britain is larger than the country’s Gross Domestic Product (GDP).

Consumer debt stands at £1,345bn and GDP – the country’s annual output – is £1,330bn. Figures come from the Bank of England and the Office on National Statistics respectively. It seems that the moment when debt passed GDP was some time in 2006.

Chief economist at Grant Thornton, Stephen Gifford, said: “Britain’s huge level of consumer debt is symptomatic of the country’s well-established ‘buy-now, pay-later’ culture. We can no longer generate enough yearly GDP to cover the amount we owe and need next year’s income to cover this year’s debt.”

According to the National Institute of Economic and Social Research, the ratio of household debt to personal income stands at 1.62 in the UK. In the US it’s 1.42, Japan’s is 1.36 and in Germany it’s 1.09. Debt repayment levels, says the Bank of England, are at their highest since the back end of the housing crash of the early 1990s.

A survey from financial website says that 7% of the public (around 2.5m people) are “very concerned” about their own ability to manage their debts, and 25% have increased the amount they have borrowed in the last three months. Around 7% have upped their borrowing by 20% or more.

Recent data has suggested that the public has reduced its credit card debt, but has switched that debt to mortgages by increasing their mortgage loans. Such borrowing is on a lower interest rate, but will take longer to pay off. Coupled with that is a warning from the Bank that 7.7% of people now have trouble paying their mortgage – and that’s the highest figure for 11 years.

MoneyExpert’s survey also said that around a quarter of its survey respondents were debt-free, and 40% did not have concerns over the way they manage their money.

Mortgage companies have started once again to tighten up their fixed rate deals, after some relaxation in the first two weeks of August. Nationwide expect the housing market to slow down to around 3.3%, which is the same level as wage rises, at their lowest rate of increase for four years.

More news on Britain’s GDP is that it might slow down in the wake of the recent stock market turbulence and the squeeze on credit. It could be as much as 1.3% lower if poor conditions carry on, and even in brighter circumstances it looks set to fall by 0.2%.

Tom Smith
28th August 2007

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