In his speech to the Conservative Party conference on Wednesday, Prime Minister David Cameron is expected to tell delegates that the current economic downturn will only be ended by a reduction in debt levels.
"The only way out of a debt crisis is to deal with your debts. That means households - all of us - paying off the credit card and store card bills. It means banks getting their books in order," he is expected to say.
According to the charity Credit Action, total UK personal debt stood at £1.45 trillion - more than the country’s entire gross domestic product (GDP), and the interest paid daily by creditors is £175 million. But faced with faltering wage growth and price inflation, consumers are increasingly being forced to use their credit cards to buy staple goods, rather than to fund luxury purchases.
“Until a year ago we were using credit cards for anything we liked, but now an increasing number are having to use them to get by each month. Obviously with inflation running at somewhere between five and 10 per cent on some of the key items, that is going to be an increasing phenomenon,” Keith Tondeur, Credit Action’s founder and president said. “For many people it simply is not possible. There are more and more people just struggling to stand still.”
Consumer spending - a key driver of the UK economy - is already showing signs of stagnating, as many households struggle with low wage growth or unemployment and inflation. Household spending declined by 0.8 per cent in the last quarter, according to the Office of National Statistics, which released growth figures on Wednesday.
Two of the UK’s retail giants - Tesco and Sainsbury’s - released less than stellar figures on Wednesday, pointing to a slowdown in spending on even basic groceries and highlighting the difficulties faced by consumers. Stimulating spending at the same time as reducing personal debt could turn out to be a complex equation.
The depth of the slump in consumer sentiment can be seen by the fact that households are cutting back on basic purchases, according to Natalie Berg, an analyst at Planet Retail.
“Food volumes are actually down in the UK, and that’s really unusual,” Berg said. “During a period of weak economic growth or low levels of consumer spending overall, it’s typical to see consumers cut back on discretionary purchases, that’s why the electrical retailers, entertainment retailers are all having a dreadful time at the moment, but what we’re now seeing is that people are buying fewer groceries.”
These cut backs are more remarkable, given the record number of promotions in stores, Berg said. In a typical supermarket, around 40 per cent of groceries are being sold at a discount. Tesco announced £500 million worth of price reductions across food and non-food items last month, in an attempt to stimulate sales growth.
“People are still not biting,” Berg said. “It’s an indication of how fragile consumers are feeling at the moment.”
In this context, Cameron’s call brings with it risks of further erosion to consumer sentiment and further stagnation.
“Common sense is now prevailing, but there’s a real danger that it could go too far, and that people who could actually continue to spend on their credit cards might, with all the doom and gloom around, go into their shell, and we end up in a recession,” Tondeur said.
“I think there’s a fine line. Yes, for those who can repay and are paying too high rates of interest, obviously that’s still sensible to do, because it means that eventually they will free up more cash to spend, once they’ve got rid of their excess interest charges. But I think there’s a real danger too that people who are savers are basically still sitting on their hands. There needs to be a balance here.”