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Consumer credit is unsustainable – Tough times lie ahead for retail and services in the UK

There has been a boom in consumer credit in recent years, which has supported consumption as wages have been subdued and inflation has been rising. Although it may seem paradoxical, households in the UK have being increasing their consumption as their real income has been shrinking. Consumer credit has recorded the highest (double-digit) growth rates since the financial crisis of 2008, amid high consumer confidence and a low interest rate environment.

Under these terms, the retail and services sector that have grown based on this credit spree are vulnerable in the face of a credit crunch and that is because the credit expansion is not sustainable in the long term as the indebtedness of households has been stretched to the limits and a slightly impaired macroeconomic outlook cannot improve this. Consumption in the retail sector has already shown signs of adjustment as last year’s figures reveal.

The inevitable tightening of credit supply by policymakers can only mitigate the impact of the slowdown of consumption, with the harmful effects of an intended gradual tightening of monetary policy being less than those provoked by the so-called ‘credit crunch’.