Consumer credit helps drive growth, but cards now marked
THE public finances, ‘the deficit', and the extent to which Northern Ireland is dependent on public spending have been much explored and discussed topics over the past 11 years since the credit crunch. We have also had access to a wide range of data on the state of the business sector, from the range of surveys by business bodies and others right down to individual filings by businesses at Companies House.
But despite consumer spending accounting for two-thirds of GVA (gross value added – i.e. Northern Ireland's total income), there has perhaps been relatively less discussion on the finances of the local consumer, in part due to an absence of relevant insight on the topic.
Consumer credit in particular is an area of the economy that has been much overlooked. In Northern Ireland there has been a lack of transparency in relation to what has been happening with credit – this was particularly a problem in the consumer boom pre-2007, when there was such a surge in things like interest-free credit and the credit card balance transfer was born.
Then, we could see the effects of the credit boom in house prices, the proliferation of second homes, and sales figures for expensive cars. But there was very little in the way of actual credit data, outside of mortgage figures. Little has been known publicly about unsecured debt such as credit cards, home loans and store cards.
A recent report from the Financial Conduct Authority (FCA), though, throws more light on this area. And from a regional perspective, the picture presented is probably as concerning as many had suspected it would be. Northern Ireland is at the top and bottom of various league tables in the report; and not in a good way.
The Financial Lives Survey 2017 is the first time the FCA has carried out a large-scale tracking survey of consumers' behaviour and experiences in relation to their finances, and will be carried out every two years.
It tells us that one-in-five Northern Ireland adults are over-indebted – a higher proportion than any other UK regions. Concerningly, 56 per cent of Northern Ireland adults exhibit characteristics of being ‘potentially vulnerable' in terms of their financial position.
Moreover, 10 per cent of Northern Ireland adults are deemed to be ‘in difficulty' financially, and a further 29 per cent are said to be just ‘surviving'. And in terms of savings and investments, nearly eight-in-10 have no investments whatsoever, whilst over half have savings of less than £2,000.
In terms of indebtedness, Northern Ireland adults have the most unsecured debt in the UK. On average, adults in Northern Ireland have £4,000 of unsecured debt compared to £3,300 for the UK as a whole. If we look at just those who have debt, the average amount in Northern Ireland is £10,700 which is more than £1,000 per person than the UK.
Northern Ireland adults borrow more using catalogue and store card credit than any other UK region, with 10 per cent of Northern Ireland adults using catalogue credit – twice the UK figure – and eight per cent use store cards, compared to three per cent for the UK.
This is the context in which we have to view the buoyant consumer spending of recent years, when retail spending has been strong and coffee shops have opened on almost every street corner. The reality is that much of this has been driven by visitor spending, the outlook for which remains positive. But local consumers are clearly stretched, and their ability to spend more will be increasingly constrained.
For one, the era of tax cuts is over, due to increasing demands on public spending, particularly in health and social care. The ‘buy now pay later' mentality in the public finances has become unsustainable. For those on benefits, most of the working-age welfare benefits are in the middle of a multi-year freeze, meaning that the purchasing power of each welfare-benefit pound is being eroded by inflation.
And more broadly, the purchasing power of consumers as a whole is being eroded by inflation, due to the fact that wages aren't rising at the same rate. Meanwhile, students face an increase in the interest rate of their student loans, with the rate rising to 6.3 per cent in the autumn.
On the credit side, banks have been trimming back the supply of the unsecured variety – credit cards, store cards and car loans – in the last 18 months, according to last week's Bank of England Credit Conditions Survey. Default rates on credit card lending in the UK saw a significant rise in the second quarter, with further rises expected in Q3 - a sign that some consumers are feeling the strain. Demand for credit card lending is still expected to rise in the coming months, but the length of the interest free period on balance transfers is being scaled back significantly.
Just like with our public finances, it appears that the Northern Ireland consumer has been spending more than it earns, and we have a higher dependency on unsecured credit than the rest of the UK, just as we have a higher dependency on public spending.
The good news is that we now have greater insight into this, which gives us some much-needed information to act on. The not so good news is that with two-thirds of the Northern Ireland private sector being driven by the consumer, the economy will continue to feel the impact of the consumer squeeze in the months and years ahead. The consumer credit sweet spot has certainly passed. Consumer-sensitive sectors beware.
:: Richard Ramsey is Northern Ireland chief economist at Ulster Bank. Follow him on Twitter at @Ramseconomics
:: Next week: Paul McErlean