Brown Has Created An Addiction To Credit
Peter Spencer of the Ernst and Young ITEM Club economic think-tank has characterised the UK consumer as being addicted to credit, according to the latest ITEM club report. The report says that while the outlook for growth remains reasonably good, most of that growth is likely to be based on borrowing, as consumers follow Gordon’s lead and steal from their future to pay for current consumption. That has created a country that is complacent about risk, and an economy that is skating on thin ice.
“Many people are following the Chancellor’s lead and are borrowing to finance consumption.”
“Both as individuals and as a country we have borrowed a huge amount to support this growth,” Mr Spencer said.
“The bottom line is that we are all living beyond our means. In the short term, Mr Brown has resorted to borrowing for consumption. If the Chancellor is forced to borrow so much when the economy’s so sweet, what will happen when it turns sour?”
The report highlights the fact that the current account deficit has ballooned, despite a healthy economy and robust tax revenues. Government borrowing is higher than forecast, with overall public sector net borrowing now expected to be £34bn in 2007 to 2008, up from the £31bn projected in the pre-Budget report.
Mr Spencer said: “The UK’s current deficit has reached 3.5pc of GDP which suggests that as a country we are close to the edge. Ultimately, we are all skating - not to say wobbling - on thin ice. There’s a danger that we are slithering into complacency.”
“The current benign macroeconomic environment has made both individuals and corporates overly relaxed about risk, inflating asset values and transactions and boosting borrowing and spending,” it reads.
“Homeowners have been under pressure from rising tax and utility bills but all the indications are that they have kept spending as if it was going out of fashion. The saving ratio [the proportion of income people save] has fallen back to just 3.7pc meaning that many households are borrowing to finance current spending.
“Lenders have relaxed their criteria and we have been gearing up accordingly.
“The US sub-prime market, which now threatens to contaminate the rest of the mortgage market, provides a clear warning of what can happen when lending criteria become too lax.”
Growth in the UK economy was driven by the business and financial services sector. The report said the strength of the business sector was reflected in industrial confidence, mergers and acquisitions, fixed investment and employment.
“It also underpins the high value of the stock market and low level of corporate yield spreads, lowering the cost of capital and providing further impetus to M&A and business investment.”
However, the ITEM Club expresses grave concerns over long-term risks to the economy: “A major threat is building up in financial market gearing, asset valuations and overconfidence.
” These markets can turn on a sixpence. The relentless upward march of prices leaves them prone to relatively minor shocks, as we saw in February. Moreover, the burgeoning current account deficit leaves the UK prone to currency weakness.
“The problem is that if asset prices do not stabilise this will leave the UK, with its heavy dependence upon financial markets, vulnerable to a crash.”
