Will Our Personal Debt Level Drive the Next Recession?

Will our personal debt level drive the next recession?

If you think back to 2008 what do you remember? Barack Obama becoming president? Beyoncé marrying Jay-Z? Or closer to home Ian Paisley stepping down as first minister or the opening of Victoria Square in Belfast? For mepersonally 2008 still resonates as the year of the recession.Working inan insolvency practiceat this time I seen first-hand the desperation for thosein financial difficulty brought on bythe banking sectors over generous lending in the boom period and in particularthe madness of sub-prime mortgages. Fast forward 10 years to today, and we are now facing asimilar period where this time personal credit is out of control in the UK and Northern Ireland. The banks and lending sector seem to have learned nothing from their previous mistakes.

Due to a FCA probe into their lending practices, Provident were faced with restructuring their business model and began issuing severe profit warnings towards the end of 2017. This seen their company value plunge by over 60%, and the talk amongst economiststhat this could be another Northern Rock scenario. WithProvident’s business model based on high-interest loans to low-income people, the issue was potentially as symbolic as the sub-prime lending of Northern Rock which collapsed in 2008, in that the riskiest lending is generally the first to feel the pinch when debt becomes unbearable for debtors. Could Provident’s difficulties be a sign thatnow 10 years on, a credit crunch is looming again?

The number of UK personal insolvenciesin 2017 showed an increase for the second year running including in Northern Ireland, andinsolvency rates also increased over the course of the year, with higher figures demonstrated in Q3 and Q4.In Northern Ireland, 2017 Q3 statistics show an increase in personal insolvencies of 25% compared to the same quarter in 2016. The economic downturn has also affected businesses, with an increase of 4.2% in UK company insolvencies from 2016 to 2017.The recent collapse of the construction contractor Carillion will also now resonate through many businesses and inevitably do irreparable harm to the finances of thesmaller companies, which maythen be forced into insolvency.On the high street, some major names such as Toys R Us, Maplin and New Look have also recently entered into insolvency proceedings. 2018 has not started well.

Unlike previous periods when insolvency rates have risen, the current figures are notable in that unemployment rates are still dropping in Northern Ireland and across the UK. This fuels a worrying trend whereby individuals may be in work and still not able to pay their essential outgoings.With a rise in the cost of living, estimated at 3% a year, and generally no increase in wages for the lowest earners, this is a sign that incomes are simply not enough to cover the essentials.

But growing consumer debt should be seen as a problem for everyone, not just those caught in debt.As levels of personal debt grow, the economy slowsas people stop spending so that they can pay their debts. When people stop spending and borrowing;revenuesfall, hiringceases and more individuals and businessesultimately fall insolvent, at which point the economy will fall into recession.

Is it too late? Can this be prevented?

The government and the banking and lending sectors need to take action, and fast.Firstly, the regulation ofcertain lending should be tougher.For example Payday loans are capped and in my opinion perhaps this should be extended by the FCA to other forms of personal debt to ensure customers are protected.
Secondly, some of the debt will never be repaid, which will continue to be a burden for households and a constraint on economic growth. At some stage, lenders mayhave to write it off or the FCA introduces tighter lending restrictions. Unfortunately at the moment when the going gets tough, lenders seemingly do the opposite and increase interest rates on credit cards and other variable interest credit, thereby exasperating the issue for those people already struggling and potentially pushing them into insolvency.

Thirdly,people in debt need to remove themselves from the stigmatism associated with it, stop being embarrassed and come speak up, to share their stories, to take action together and put pressure on the lenders, FCA and government.Ask anyone who has lived with multiple credit facilities, payday loans and the fear of opening their postand they will explain how corrosive debt can be. Interest repayments exasperate poverty and deprivation and have profound effects on mental health and wellbeing.As debt increases you lose control and become depressed and anxious. The lack of a way out affects your mood, creates psychological problems. We need to ensure those in debt are not frowned upon by society but encouraged to use their experiences to drive change for the benefit of everyone.

Ending the downward spiral of household debt matters seems to only matter to those caught in its midst. But for the sake of our economy and try to avoid a recession, which is for the sake of everyone’s prosperity, we now should all be on side of debtors.We don’t need a singing canary to tell us there’s a gas leak; we need to start asking how to escape this ticking time bomb.