Increase in borrowing raises chances recession will be mild

The increase in consumer credit to £1.6bn in January, the highest borrowing since June 2022, combined with another relatively low increase in household savings suggests that consumers are becoming more willing to start spending again. This raises the chances that the UK will avoid a recession altogether or that any dip will be mild and short-lived. 

However, it is too early to make a call on consumers changing attitudes. We are yet to see most of the impact of the huge rise in interest rates over the last year and the withdrawal of government energy support will cause another drop in real incomes. For what it’s worth, we still think the UK economy will fall into a mild recession in the first half of this year, before growth resumes in Q3. 

Even if the UK does avoid a technical recession (two consecutive quarters of negative GDP) we will still enter a ‘slowcession’, where growth essentially flatlines. It will probably be the end of 2024 before the UK economy is back to its pre-pandemic size, representing four years of stagnation. 

Households' willingness to borrow more and reduce savings will be critical if the UK is to avoid a recession this year. The stock of households' savings is now £190 billion above the level it would have reached if they had continued to add to them at the 2018 to 2019 average rate since January 2020 (See Chart.) And even though households have stopped adding to them at an above average rate, they are not spending them yet. 

Further house price falls likely

Approvals for house purchases, an indicator of future borrowing, decreased to 39,600 in January, the lowest since January 2009 excluding the pandemic, from 40,500 in December and a peak of 74,425 in August. This dramatic slowdown in the housing market is due to the ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increasing by another 21 basis points to 3.88% in January. 

The decline in mortgage approvals adds to the evidence that the UK housing market is going through a correction. There is usually a lag between mortgage approvals and its effect on house prices. This data provides a reliable guide to housing activity in the months ahead. However, there are three reasons why a house price slump should not be a huge concern to the market: 

1. the huge growth over the last two years; 
2. the strength of household balance sheets; and
3. the tightness in the labour market.

Overall, it’s clear that consumers are still taking a cautious approach to saving and borrowing, although there are early signs this is improving. Until consumer confidence improves significantly, which may not be until the second half of this year when real wages start to rise again, consumers are not likely to follow the example of those in the US and significantly run down their savings.