Walls of "powerhouse" UK begin to crumble

Saturday, May 07, 2005

Victorious labour leader Tony Blair, a good leading indicator for Britain's cooling housing market as his own upscale property is still empty of tenants, faces first problems from economically weakening consumers, tells this report found in The Guardian. Compared with the ailing economies in continental Europe Britain was dubbed a powerhouse in the last months. A cooling housing market and the highest personal debt levels in the European Union could become the demolition ball for the powerhouse.
Personal bankruptcies hit record
The number of people going bankrupt reached record levels in the first quarter of this year, official figures showed yesterday, highlighting the economic problems facing the new Labour government. With consumer borrowing now standing at more than £1 trillion, the recent rises in interest rates have led to a growing number of individual insolvencies. The Department of Trade and Industry said the number of bankruptcies jumped to 13,229 between January and March, up 1.6 percent on the previous quarter and 28 percent higher than a year ago.
The insolvency figures follow the publication last week of record numbers of mortgage repossessions.
Personal bankruptcies are now more than a fifth higher than during their peak in the early 1990s, when the economy was emerging from recession and almost a million households were in negative equity. Economists warn that there is worse to come.
Vicky Redwood, a UK economist at Capital Economics, said it was unlikely that the numbers had peaked. "We estimate households are paying the equivalent of 21 percent of their disposable income on interest and debt repayments, the highest since 1990," she said.
Since interest rates are likely to be very close to their peak, household debt servicing costs are unlikely to rise much further. However, in the early 1990s, bankruptcies continued to rise for a full three years after debt servicing costs hit their peak, Ms. Redwood said. Even though interest rates 15 years ago were higher than they are now, the cheaper cost of borrowing has encouraged consumers to take on record levels of personal debt.
UK economist John Butler at HSBC said: "[The rise in bankruptcies] seems to support our analysis that households' high level of indebtedness has made them more sensitive than in the past to small changes in interest rates."
Economists were also concerned about the high level of bankruptcies, despite employment being at record levels. Only a third of those declaring bankruptcy were unemployed, suggesting that even those with a regular income are running into financial difficulties.
In recent years, consumers have been cushioned from the reality of high debt by rising pay and a strong housing market, allowing them to withdraw equity. But rising tax and fuel costs have put a dent in disposable income and a flat housing market has led to drop in equity withdrawals. As a result, people are now struggling to pay back their loans.
"The data support our view that with households suffering under record indebtedness and the delayed effects of higher interest rates, on top of a weakening housing market, the recent slowdown in household spending growth is here to stay," said Ms. Redwood.
Mr. Butler agreed: "The vulnerability of the household sector is acting like a timebomb which will ultimately cast a shadow over the UK's medium-term outlook.


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