By Kathleen Brooks, research director at XTB.com

Consumer credit was stronger than expected last month, and rose by £1.9bn, faster than the £1.5bn expected. Excluding last November, when consumer credit surged by £2.09bn, this is the largest monthly increase since 2017. Nearly half of the consumer credit increase was due to rising levels of credit card debt, which may be a sign of consumer confidence to take on more debt. The annual growth rate for consumer credit was 8.9%, the highest growth rate since 2018.

The UK’s consumer borrowing habits seem to be back to their pre-covid norms, suggesting that as pandemic era savings get run down, people are turning to credit to maintain spending levels. But how does the UK compare to other countries? In 2023, the US saw consumer credit growth slow. Household debt in Q4 2023, the last data available, rose by 1.2%, this included a $50bn increase in credit card debt over the quarter, which suggests that the growth rate in consumer credit is lower in the US than the UK.

A rise in household debt is not necessarily a problem, and it can boost economic growth, however, it does give rise to concerns about delinquency rates. If lending rates are rising, then there is a chance that the delinquency rate may also rise.

In the US, delinquency rates for car loans and credit cards have been rising. The Federal Reserve reported that aggregate household delinquency rates were 3.1% in December, it also reported that approx. 8.5% of credit card balances and 7.7% of auto loans had transitioned into delinquency last quarter. Delinquency rates had surpassed pre pandemic levels, particularly for younger borrowers, according to the Federal Reserve. Loan loss rates are low for the UK right now, however, the UK may follow a similar pattern if consumer credit growth continues to rise at this pace.

Elsewhere, mortgage approvals picked up in January, rising by 55.2k, vs. 52k expected, adding to evidence that the UK housing market is receiving a boost in 2024. The money supply for January was also released. The M4 money supply, which includes all notes and coins in circulation and all sterling deposits, fell 0.1% in January, with the annual rate declining by 2.2%. This is the seventh consecutive month of money supply contraction. This is a sign of high interest rates, and typically it corresponds to weaker economic growth. Although the UK economy is in a technical recession, growth has been mostly flat, defying fears that higher interest rates, and a falling money supply, could lead to a deeper downturn. Perhaps, things are different in this economic cycle? Either way, the decline in the money supply at the start of the year is mildly dovish for UK interest rate expectations. 

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