(Bloomberg View) -- For the U.K. economy, the good news is that following the Brexit vote, the sky hasn't fallen as many predicted; on the contrary, it's been a period of unexpected fair weather. The bad news is that the benign outlook is encouraging a surge in borrowing, leaving households vulnerable if the Bank of England decides to tighten monetary policy.
Andy Haldane, the chief economist at the central bank, said last week that as far as the British consumer is concerned, "it's almost as though the referendum had not taken place." That, he says, helps explain why the central bank's gloomy prognosis of what a vote to leave the European Union would do to the economy has thus far turned out to be wrong.
QuickTakeWhy Britain Voted to Quit the EU
The nation appears to have been in celebratory mood this Christmas. Credit-card company Visa said on Monday that U.K. spending jumped 2.6 percent in December from a year earlier, led by a 7.3 percent jump in hotels, restaurants and bars. In the final three months of 2016, overall spending posted its strongest growth in two years, Visa said.
Britons have been loading up on debt. At the start of 2000, households had debts about equivalent to their disposable income. The ratio surged in the following years, peaking at 160 percent in the first quarter of 2008.
As the financial crisis took its toll, people scaled back on borrowing, and the ratio had dropped to about 137 percent by September 2015. But it then rose for four consecutive quarters, with the most recently available figures showing a jump to 143 percent in the third quarter of last year:
As the chart shows, Brits are more indebted than their peers in either the U.S. or the euro zone. Perhaps unsurprisingly, while British households are still making their payments on secured loans such as mortgages, defaults on unsecured loans surged as the total debt burden climbed:
Holger Schmieding, the chief economist at Berenberg Bank in London, reckons the jump in borrowing has implications for monetary policy. "Without the uncertainty caused by the Brexit vote, the rebound in U.K. consumer credit would already have warranted higher Bank of England rates," he says.
One reason Brits might be happy taking on more debt is that expectations for where borrowing costs are headed in the coming years have collapsed.
The Bank of England surveyed households in September about their borrowing cost expectations. The yellow line in the chart below shows the level and direction expected for the central bank's benchmark rate by financial markets, while the diamonds show what consumers were anticipating; the purple line shows what those same expectations were in September 2015, while the blue line is for 2014:
The futures market suggests there's only about a 26 percent chance of a rate rise by the start of next year, with an equal chance of either higher rates or that the benchmark rate will still be 0.25 percent by the end of 2018. Haldane concurs, saying last week that while faster inflation could prompt a tightening, slower growth could equally restrain policy.
But if the economy continues to surprise on the upside and the acceleration in inflation is faster than the central bank is currently forecasting, debt-laden Brits who've enjoyed almost a decade of rates never rising could be in for a shock.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
To contact the author of this story: Mark Gilbert at magilbert@bloomberg.net.
To contact the editor responsible for this story: Therese Raphael at traphael4@bloomberg.net.
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