Citywire printed articles sponsored by:
View the rest of this gallery online at http://citywire.co.uk/wealth-manager/gallery/a697252
Eight Graphs: Subprime UK - how Wonga is driving the recovery
by David Campbell on Aug 15, 2013 at 09:02
The UK economy appears to be reaching escape velocity - but the drivers feel very reminiscent of 2006.
Something like euphoria has broken out over the state of the UK economy in the last two weeks, as lead indicators finally began to thaw. The service sector PMI in particular hit its second highest point ever in July, sending the composite to an all-time record. But is the recovery built on shaky foundations?
While the recovery appears broad based, it is also disproportionately reliant on consumer manufacturing and spending. The housing boom/bubble has already been well discussed in these pages, but for those uneasy about the sustainability of consumption it already feels reminiscent of the pre-crash economy.
The upward trajectory in lead indicators was led by a sudden spike in consumer spending over the first part of the year, up 6.5% over 12 months after several years of steadily grinding lower. This was ahead of April gains in top-end consumption as bonuses were deferred to after the reduction in top tax rates.
Given this can’t be credited to the top percentile of earners, where did the money come from? Income growth actually returned below 1% in May, as the UK faced a fifth year of sub-inflation rises. Partially it can be credited to lower savings, but as these were already low, this can’t account for all.
While this is may be only correlated and not causal, it doesn’t take a conspiratorial mind to suspect it’s due to the real British vice: credit. Consumer credit creation is suddenly booming at 14.6% growth in June – the second consecutive month of +10% rises. The great era of household deleveraging appears to have ended.
While banks and mutuals have begun to lend again, they are actually creating a minority of new loans. More than half – 52% - was credited in June to the ‘other’ column: this includes non-standard mortgage lenders but primarily consists of high street sub-prime – pawnbrokers and payday lenders.
While this sector remains small relative to the banking mainstream, it is rapidly making up the ground, with its share of credit issuance effectively doubling over the last two years alone as the bank and mutual sectors basically held their balance sheets static.
The Office of Budget Responsibility actually predicted the recovery would be conditional on a credit boom as far back as 2011, suggesting household leverage would rise to 175% by 2015. The danger they did not foresee is that unlike regular credit, which smooth consumption, usurious rates destroy future consumption.