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The UK Consumer Battle Cry: "Chaaarge... it!"

Why we believe the resurgence of credit across the pond is not a sign of consumer resilience

by Nico Isaac
Updated: February 21, 2017

It's hard to believe the very first credit card, the Barclaycard, was introduced in the United Kingdom in 1966 -- over half a century ago.

At the time, the Barclaycard was sent in the mail, unsolicited, to 1 million pre-approved customers. Once they received the card, however, it wasn't exactly clear how -- or even why -- to use it. Only select stores accepted it, and only higher-up managers could operate the old-fashioned metal hand-swiping machines that inevitably left carbon ink stains on your fingers.

In a 2006 BBC News article, one bank clerk who witnessed the Barclaycard debut recalled the not-so-enthusiastic response from consumers:

"People didn't know what they were really, they just arrived on their door mats... We got loads of letters back saying 'what the hell are you doing, we shall never use these'."

Flash ahead to current day, and the scene couldn't be more different. Today, British consumers can't get enough of their "flexible friends." To wit: In 2016, unsecured borrowing in the UK rose to an all-time record and "consumer credit, which means all credit cards and car loans, had risen at its fastest rate in 11 years." (Jan. 11, The Guardian.)

Blighty's credit boom has, in large part, been fueled by World War C -- an intensely competitive battle among credit card companies to win over customers via irresistible offers. Some of the most popular bells and whistles include zero percent interest rates for extended periods, incredible travel rewards, spending vouchers, and no-cost transfer deals. Writes a January 11 Guardian:

"Choice is once again a feature of the market, with 122 balance transfer deals for consumers to scrutinize. That compares with 133 in January 2007, before the financial storm hit.

"The key battleground is now the length of deal, which can be measured in years rather than months: today the average balance-transfer deal lasts 659 days versus just 295 days in January 2009, when the country was mired in recession."

Some interpret the resurgence in credit as a positive sign, especially in light of Brexit, which many expected to dampen consumers' appetite for debt. From the January 18 Wall Street Journal:

"British Consumers Keep Economy Humming Months After Brexit Vote.

[Confounding] predictions that they would cut back on spending."

But there's another side to the coin -- or card, as it may be. In a 1966 television commercial for the brand-new Barclaycard, a well-dressed man sits down at his desk to settle his monthly bill amidst this voiceover:

"A man can manage his money with confidence when he known he can keep his spending under control and also, he will be able to pay without difficulty."

Is that what's happening now? Are UK consumers "able to pay without difficulty"?

In our opinion, the answer is no. Being able to pay depends on one's ability to earn, and our January 2017 European Financial Forecast showed one sign of the challenges facing consumers with the following Bloomberg chart of real wage growth in the UK:

"The last time wage growth was weaker than it is today was in the 1860's...

"Not even the Great Depression or two world wars produced a period of falling real wages like the present one."

As a follow-up, our February 2017 European Financial Forecast shows the mind-boggling surge in UK consumer credit growth since 2012:

Turns out, that "engine" of growth is not being used to drive the economy, but rather, to jump-start consumers' already exhausted debt burdens. Writes European Financial Forecast:

"Consumers' massive debt build-up -- and the attendant famine in savings -- is already striking hard at business activity."

In our opinion, this portends only one, not very pleasant, outcome for the future of the UK economy -- and Europe as a whole.

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