Are we doomed to wander the corridors of austerity for another decade?

26th January 2012  

Depressing news from consultancy company McKinsey suggests that our love affair with our credit cards could cost us all dearly for at least another 10 years. Britain now has the second highest level of debt among all the major global economies. The only country statistically worse off than the UK is Japan. In the past three years, UK debt has risen to more than 500% of national output, meaning that it’s going to take much longer than expected to balance the books.

The rise has been fuelled by increased debt in the financial sector, as people try to ‘borrow their way out of debt’. Despite media reports on how belts are being universally tightened by cash-strapped consumers, the reality is that there is still a massive amount of debt that needs to be brought under control. And according to McKinsey’s report, it will take us until 2020 to return to pre-2003 levels. The UK press and the credit card issuers continue to report that credit card borrowing is slowly coming down, but other areas of borrowing are still groaning with debt.

Really, it is a global crisis

But it’s not just the UK that’s facing a hard, uphill slog towards financial solvency. McKinsey’s 60-page report compared major economies since 2008, and concluded that:

“Overall, the United Kingdom needs to steer a difficult course: reduce government deficits and encourage household debt reduction – without limiting GDP growth.” This statement may be regarded by some as a little trite – it’s all very well saying that household debt has to be reduced, but how do we do that without impacting on GDP growth?

The economy needs consumers to be spending in order to grow, and the truth is that people just do not have the spare capital to fritter away right now. So should we all be boosting the economy by spending on our credit cards? Surely that would compound the personal debt situation even further?

This catch-22 situation is going to be a tricky one to navigate out of. Every country is desperately trying to cut their levels of debt. It’s not just a 3rd world concern now – even the most powerful countries on earth are facing debt crises. But how they tackle that problem dictates the future winners and losers over the next 10 years.

Bring me your huddled debtors…

The US seems to be leading the way, making the most rapid progress on its debt situation compared to its peers. That doesn’t mean that everything in the ‘Land of the Free’ is rosy – just that they seem to be keeping their heads a little further above water than the rest of us. US households have managed to reduce their debt to disposable income ratio by 15%, while in the UK consumer borrowing has edged slightly up.

According to McKinsey, every economy is still only in the first phase of de-leveraging, and that we still have a long way to go.

Susan Lund, director of research at McKinsey, sums it up succinctly:-

“Even in countries that have begun to adopt plans to reduce budget deficits…they’re being held back by the lack of strong economic growth. The focus at this point should really be on getting the private sector debt under control.”

So it looks like consumers in the UK are going to have to cut a couple of extra holes in their belts and continue to tighten them for a while yet. As long as lenders recognise that they will need to be a little patient with their customers, and that consumers don’t start relying on credit cards to get them through tough times again, there is light at the end of the tunnel, albeit a very faint one.

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