A speech by Financial Policy Committee member Alex Brazier is the latest warning shot from policymakers on the risks arising from recent rapid growth in unsecured borrowing. But the dangers to the overall economy from this development still strike us as limited.
In comments delivered on 24 July, Mr Brazier warned that a sharp rise in unsecured loans alongside weak growth in household incomes could pose a threat to the economy. And UK banks were in danger of entering “a spiral of complacency”, by reacting to a period of reasonable economic growth and low interest and loan default rates by weakening credit standards.
Higher unsecured debt leaves individuals more vulnerable to income shocks. But households in aggregate are currently in a reasonable position to take on debt thanks to deleveraging since 2008 and record-low borrowing costs. The share of household incomes absorbed by interest costs has not been so low since records began.
And the balance sheet of UK households is historically strong. At the beginning of 2017, households’ net holdings of financial assets amounted to almost four times annual income, a near-record high. Moreover, 40% of households with consumer debt have savings bigger than their outstanding debt.
Historically, one of the biggest shocks to borrowers’ spending power has come from a steep rise in interest rates, with knock-on consequences for activity and employment. But with the current episode of elevated inflation likely to be nearing its peak and an absence of underlying price pressures in the economy, a hike in Bank Rate looks a far-distant prospect.
Finally, there is also cause for confidence on the supply side. UK banks are far better capitalised than in 2008. And bank's losses during the financial crisis were overwhelmingly driven by bad decisions overseas, not bad loans at home.
President Andrzej Duda’s veto of two of Poland’s controversial judicial bills suggests that the ruling Law and Justice (PiS) party is now scaling back some of its controversial legislation following pressure from civil society and the international community. But we are sceptical that PiS will abandon its drive to consolidate power and therefore see the political risk premium persisting in the near term.
In terms of market implications, we think Poland’s asset performance will continue to be driven by the solid macroeconomic momentum, which is unlikely to be dented by the latest political developments in the short term. In the medium to long term, however, we continue to see the adverse institutional developments as a downside risk to an otherwise solid structural growth story.
The business climate indicators for Germany and France showed further broad-based improvement in July. This contrasts with evidence from other recent surveys like the ZEW, Sentix and the PMIs, where sentiment seems to have turned down. The German manufacturing ifo even surpassed its last cyclical high (of February 2011), pointing to ongoing impetus from the global cycle; a stark contrast to the manufacturing PMI that fell to a 3-month low.
Short-term discrepancies between different survey measures are not unusual and are not a worry in an environment where some surveys have been overestimating the pace of economic growth. If anything, the strong national surveys suggest that growth in Q3 should remain robust and lend further support to our above consensus Eurozone growth forecast.
The Russian economy continues to display signs of recovery, but the outlook is becoming increasingly weighed down by rising geopolitical risks and weak oil prices. A likely expansion of US sanctions against Russia will probably weaken confidence in the economy’s recovery, and keep private investment depressed, while a further slide in oil prices would pose further downside risks. But for now, we maintain our GDP growth forecasts of 1.4% pa for both 2017 and 2018.
The economy continued to recover in April, and – encouragingly – the expansion is becoming more broad-based, with other sectors starting to show signs of recovery in addition to those already apparent in construction and agriculture. However, the increased political noise over the mid-term elections will likely constrain the pick-up in both private consumption and investment. We maintain our GDP growth forecast for this year at 2.5%.
Australia will not be leaning toward tightening just yet. The end of the commodities boom has led to structural changes that are shifting resources – particularly labour – out of the mining sector. With non-mining investment relatively lacklustre and residential construction activity slowing, there will be continued weakness in growth, employment and wages. As a result, we expect the RBA to be cautious in its approach to monetary tightening, keeping the cash rate at 1.5% until Q2 2020.