Economic Recovery on the Horizon As Borrowing on the Rise

Household borrowing has outstripped loan repayments for the first time in eight months, as the UK economy edges towards recovery from the pandemic.

New data from the Bank of England shows that Britons borrowed more than £0.4 billion in personal loans and car finance in May, helping to push overall borrowing to £0.3 billion more than was repaid.

At the same time, the cost of borrowing through personal loans and overdrafts fell.

Average interest rates on personal loans fell to 5.6%, compared to 7.0% in January, while the average interest charged on overdrafts fell to 19.8%- dipping just below 20% for the first time since August 2020.

Experts point to the increase in borrowing as an early indicator of economic recovery, as consumers warm to the idea of spending after a period of collective cautiousness through much of the pandemic.

In 2020, the UK's GDP fell by 9.9% in 2020, marking the largest contraction on record and the greatest economic decline among any of the G7 nations.

Capital Economics' Senior UK Economist, Ruth Gregory, said:

The signs that households have started to borrow again provide us with confidence that May's surprise fall in retail sales was a result of a shift in spending from retailers to other areas as the economy continued to reopen, rather than an indication that the economic recovery is already spluttering.

The Office for National Statistics reported that in May, retail sales fell by 1.4% but suggested this was likely due to a shift in spending as the hospitality sector reopened in line with lockdown easing.

Since the start of the year, household savings have increased on average from 16.4% of disposable income in the last quarter of 2020 to 19.9% in May, according to the Office of National Statistics.

This boost to savings will provide the economy with 'plenty of firepower to fuel a recovery, suggests EY Item Club' Senior Economic Adviser, Martin Beck:

[With] reports suggesting vaccines look effective at weakening the link between infections and hospitalisations and deaths, the EY ITEM Club currently forecasts that the economy will regain its pre-pandemic size by the end of 2021.

Low-interest rates and significant inflation spurred on in part by the government's multi-billion recovery stimulus are expected to create a spend-friendly environment and fuel recovery, says AJ Bell Financial Analyst Laith Khalaf:

After a long period of hibernation, its natural consumers are enjoying a bit of the old normal, and many have built up a sizeable war chest of savings over the course of the pandemic.

Unfortunately, those savings are earning next to nothing in the bank, and now inflation is on the rise, they're actually losing their buying power more quickly. Indeed, the Bank of England now expects inflation to rise above 3% later this year, and that may yet prove to be a conservative estimate.