A Recovery Built on Thin Air

A Recovery Built on Thin Air

You could be forgiven for thinking that the economic recovery is under way in the UK. Gross domestic product grew by 0.7% in the second quarter and the National Institute of Economic and Social Research expects growth of 1.2% for the year as a whole. Meanwhile, British industrial output grew at the quickest pace in more than two years in June and house prices have expanded 4.6% year-on-year – driving the UK’s average house price to the highest level ever.

However, this growth is underpinned by debt.

The average amount owed per UK adult ticked up to £29,008 in June, from £28,990 in May – 117% of average earnings.

Total household debt is expected to reach £1.931 trillion in Q1 2018, up from the current figure of £1.421 trillion (35% rise) – this is assuming the number of households in the UK remains constant.

Currently, debt on household interest is costing the country £59.9 billion a year, £164 million per day, £2,272 per household per year – remember this is at 0.5% interest rate.

Factor in the fact that household debt is expected to rise 35% by 2018, that means the average household will be paying out £3,067.2 per year in interest – with a base rate of 0.5%.

Now, factor in the fact that the average UK wage is £26,500, an in real terms is now worth less than it was in 2005. Almost 10% of gross income is currently being spent on debt interest; per household, (excluding taxes, utility bills and food)

What happens if the base rate rises 100bps, in the worst case a 200% rise in interest payments can be assumed; worst case debt interest per household rises to £6,816 annually per household, 25% of gross income.

With house prices rising so fast, the Bank of England could be forced to raise rates as inflation is now far outpacing economic and real wage growth.

When this happens growth could be very quickly brought to a halt.

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