Consumer revival fails to ignite as households opt to clear their debts
Fears of jobs crisis fuelling a rush to clear borrowings – at the expense of the high street – finds Russell Lynch
Households shaken by Covid-19 are still paying off debts despite the reopening of shops last month. The Bank of England’s money and credit data paint a picture of a consumer revival struggling to gain momentum as households paid off more borrowings rather than splashing out in June, as well as piling up billions in unspent cash.
Since the outbreak struck in March, households have paid off £15.6bn in credit card and overdraft loans. Last month they made another smaller overall repayment of £86m, as £248m cleared off credit cards outweighed £162m in other borrowing.
The trend in household borrowing is “significantly weaker” than the year before the crisis, when consumers were racking up £1.1bn a month in extra debts, according to Threadneedle Street.
The rush to clear borrowings comes amid fears of an unemployment crisis, given tens of thousands of job cuts at some of the UK’s biggest companies and the looming curtailment of the Government’s furlough scheme, which has so far protected more than nine million jobs.
Over the past year consumer credit has shrunk by 3.6pc, the weakest since the Bank’s records began in 1994, casting a shadow over the recovery given that consumers account for about two thirds of UK output. Signs of the lingering caution were also seen in household savings as people sought to Covid-proof their personal finances ahead of a jobs storm, while the closure of bars, hotels and restaurants slashed spending.
Deposits swelled by £11.6bn in June as £9.5bn was added to savings accounts, taking the total stashed away by households since March to almost £70bn as people took advantage of the furlough scheme and mortgage payment holidays.
A small £1.8bn rise in overall household borrowing over the month was entirely accounted for by the housing market. Lenders approved 40,010 mortgages for new house purchases last month, 46pc below February’s 73,700 level.
Businesses have also taken advantage of support schemes such as VAT deferrals to pile up a further £7.8bn in cash over the month.
Larger firms paid off a record £16.7bn in borrowing during May but smaller companies tapped support through the Bounce Back Loans initiative to hoover up £10.2bn in borrowing, dwarfing the previous high of £600m in September 2016.
Across households and businesses combined since March, an extra £175bn has been deposited with banks – more than the cumulative total for most years. In the year to February, £98.3bn was deposited at an average of £8bn a month.
Samuel Tombs, at Pantheon Macroeconomics, said the extra funds were likely to be needed by firms as trading losses eat into reserves.
He warned: “Uncertainty about a second wave of the virus and its financial impact also will persuade firms to maintain high cash balances in the second half of this year, rather than go on a spending spree.”