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Debt overtaking GDP in Britain too

Section: Daily Dispatches

Record Numbers Face Debt Meltdown

By Edmund Conway
The Telegraph, London
Thursday, August 23, 2007

The scale of Britain's personal debt mountain has come into sharp focus with new research showing a record number of households are facing serious debt repayment problems, and that Britons owe more money than the entire economy can generate in a year.

They coincided with a warning from mortgage lender Nationwide that house prices are set to fall sharply back into line with wage inflation next year, as the credit crunch pushes up interest rates for families around the UK.

With America already facing a severe potential consumer downturn, the research from a variety of sources is the latest reminder that Britain's overstretched households remain one of the most vulnerable parts of the economy.

Research from accountants Grant Thornton shows that the total stock of consumer debt owed by British families is larger than Britain's gross domestic product (GDP). Bank of England figures show that Britain's consumer debt stands at £1,345 billion -- higher than Britain's annual output of £1,330 billion, according to the Office for National Statistics.

According to comparable figures from the Treasury, the landmark moment when debt exceeded GDP took place last year. Stephen Gifford, chief economist at Grant Thornton, said: "Britain's huge level of consumer debt is symptomatic of the country's well-established 'buy-now, pay-later' culture. We can no longer generate enough yearly GDP to cover the amount we owe and need next year's income to cover this year's debts."

The calculations illustrate how fast Britain's debt levels have grown in comparison with its economic output. According to the National Institute of Economic and Social Research, the ratio of household debt to personal income is 1.62 in the UK, compared with 1.42 in the US, 1.36 in Japan and 1.09 in Germany.

The Bank of England has calculated that debt repayment levels have now climbed to their highest level since the tail end of the last housing crash in the early 1990s. Its Monetary Policy Committee has raised interest rates five times in the past year.

A new report found yesterday that around 7 percent of the public -- equivalent to 2.5 million people -- are "very concerned" about their ability to manage their debts.

The survey from financial website found that a quarter of consumers have added to the amount they owe over the last three months, with around one in 14 increasing their borrowing by a fifth or more.

The survey supports evidence that many households may have reduced some of their credit card and unsecured debts by extending the size of their mortgages. Although such debt is taken on at lower rates, it may take much longer to pay back.

The Bank recently warned that the proportion of households having trouble paying their mortgage had risen to 7.7 percent -- the highest level since 1996.

The survey showed that, of more than 2,000 adults asked, just under a quarter were debt-free, with 40 percent unconcerned about their ability to manage the money they owe.

Meanwhile, further evidence emerged that the ongoing financial crunch faced by credit markets could have a direct impact on households, as mortgage companies ratchet up their fixed-rate deals. Fionnuala Earley of Nationwide said she expected house prices to rise by no more than wage inflation next year -- the current rate of which is at a four-year low of 3.3 percent.

A study from investment bank UBS also showed that UK GDP growth could be as much as 1.3 percent less if the credit squeeze worsens, US house prices slump and the MPC does not cut rates. If tight credit conditions alone persist, GDP growth rates could be 0.2 percent lower even if the MPC cuts rates, it also warns.

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