Has Brexit triggered a borrowing binge?
We noted an article on Bloomberg according to which the reluctance of the British economy to collapse after Brexit may be due to borrowing, which may leave the economy vulnerable once the Bank of England starts tightening monetary policy. He noted a report from the credit card company Visa, which recorded a rise in December transactions by 2.6%, compared to last year. This is the strongest annual growth rate in two years. Not all of that, however, is due to the rapacious consumer. Transactions in the hotel sector have gone up by 7.3%. Since December is not a holiday season for British tourists, much of this will be due to business booking and foreign travellers, who are benefiting from the low exchange rate.
The overall debt statistics cited are interesting, but not yet on the scary side. The ratio of household debt to income was always higher in the UK than on the continent because of the way the housing market works. It was around 100% in 2000, and rose to 160% in 2008. A period of debt deleveraging brought this number down to 137% by the middle of 2015, but this period has ended, and is back back to 143% in the third quarter of 2016. And the default rate on unsecured loans is rising.
The article argues that one of the reasons for the borrowing binge is the expectation that interest rates will remain low for a very long time. The futures market implies a 26% probability of a rate rise by early 2018, and a 50% chance of a rate increase by 0.25bp by the end of that year. So the biggest risk would be an economy that surprises on the upside.
We would note that this observation is true in a trivial sense but, given the Brexit scare, this is a bit of a luxury argument. In the eurozone, an upside economic shock could force the ECB to abandon QE early and this could be fatal for Italy, especially in the confluence of negative political events. But, for the UK, a positive economic shock would be mostly benign. It would wipe out some of the more reckless borrowers, but would be unlikely to produce a nationwide financial crisis. And if Brexit turns out negative economically, as most economists have forecasts, the optimistic expectations of the futures markets are probably correct, in which case consumers' expectations of continued low interest rates would be borne out.