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

The Daily Telegraph - Business - - Business -

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.”

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