The UK consumer market experienced some challenging economic conditions during the economic crisis of the mid-2000s, but has enjoyed strong growth in recent years. UKFS, a part of Timetric, looks at whether the good times are likely to continue

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Since 2008, the consumer credit industry has gone through a sharp retraction and then a period of growth. In the case of Motor Finance this growth has been especially strong. The turnaround has been the result of a variety of factors. Motor Finance has dedicated many pages to industry specific reasons for the turnaround – such as the push for PCP and dealer and customer incentives for buying their new cars on finance.

Yet the motor finance trade doesn’t take place in a vacuum, and a number of macro factors have also impacted on the industry such as low interest and recovering consumer confidence and wage growth.

Below is an edited down version of a UKFS business intelligence centre report on the industry, looking at how and why consumer credit has grown the way it has, and a look at what might impact on it to 2019.

Demand for credit

The stock of outstanding consumer credit stabilised throughout 2013 and grew consistently during 2014, where it recorded a positive growth rate for all 12 months. While total outstanding lending fell from £172.5bn to £168.8bn from 2010 to 2014, the most substantial decline came in 2011. Outstanding lending has actually been increasing since 2013, and recorded a 6.7% growth rate in 2014, to rise from £158.2bn to £168.8bn. This recovery has continued into 2015, as the overall stock increased by 2.1% up to June, where it totalled £172.3bn; the highest total recorded since November 2010.

Demand for consumer lending rocketed during the fourth quarter of 2014, as payday lenders pulled away from the market due to more regulations and mainstream banks loosening their lending criteria to compete.

Demand in the final quarter of 2014 marked the highest level since before the financial crash, according to the Bank of England’s Credit Conditions Survey.

Gross lending grew between January 2010 and June 2015, especially in 2013, increasing at a monthly average growth rate of 0.63% and an average annual rate of 6.9%.

Lending in the category rose from £13.1bn to £20.1bn from January 2010 to June 2015. The industry increased year-on-year throughout the period’s Januaries, from £13.1bn in 2010 to £19.6bn in January 2015.

Monthly lending grew steadily during this period, with the highest average monthly growth rate being 0.79% in 2014, though the highest annual growth rate – 12.3% – was from 2012 to 2013.

Improving economic conditions combined with record-low interest rates have encouraged banks and consumers to lend and borrow more since the start of 2014. Borrowing is now cheaper than it has ever been in the UK, which is starting to trigger an increase in lending; a situation which has played out so far in 2015. Every month from February to June 2015 marked the highest monthly total gross lending total on record, with June recording a total of £20.1bn.

Consumer credit net lending has been close to zero since the start of 2013, and fluctuated regularly through until at least June 2015, as gross repayments and gross lending remained close. Gross lending began the 2013-2015 period below repayments and finished, as of June 2015, slightly above – outstripping repayments consistently from July 2014.

Total gross lending has always remained between £15.1bn and £21.9bn during the two-and-a-half year period, while total repayments stayed between £15.1bn and £20bn, which highlights how close they stayed and how little fluctuation both saw.

Net lending was positive every month from the start of 2013 to June 2015 – with the exception of seven months, and just one month since March 2014 – as consumer confidence continued to grow. Negative growth was recorded in each of the three Januaries, as consumers seasonally tighten up after the Christmas period and pay off their debts.

Consumer Confidence

Consumer confidence is an indicator designed to measure the degree of optimism that consumers feel about the state of the economy and their personal finances. The level of optimism regarding income stability determines spending activity, and therefore serves as the economy’s key driver of near-term economic growth.

Consumer confidence has picked up a great deal since mid-2014, and has been the driving force behind the surges seen across the consumer credit industry. The index score was -13 in January 2014, but rose to 7 in June 2015 and averaged 3.1 in 2015. This is after recording averages of -29, -19.9 and -3.75 throughout 2012, 2013 and 2014, respectively.

Consumers tend to make more purchases when confidence is higher, which subsequently boosts economic expansion. In contrast, if confidence is low, consumers tend to save more than they spend, prompting economic contraction.

Consumer confidence in the UK has improved in line with tentative economic recovery, however, and the GfK consumer confidence index reached a seven-year high in July 2014.

UK consumer confidence overtook the global average in July 2015 for the first time in more than nine years, according to research from Nielsen.
These rates have surged thanks to record high employment, extremely low mortgage rates, rising wages, and low inflation since mid-2014.
New motor finance

The overall annual value of advances for new cars increased every year from 2011 to 2014, and is set to do so again in 2015. The total value in 2011 was £6.8bn, while it was £9.5bn in 2012, £12bn in 2013 and £14.1bn in 2014, with the 2015 value recording £7.4bn at the end of June.
The pattern for the number of new cars bought was the same, increasing annually from 510,500 in 2011 to 625,400 in 2012, 797,700 in 2013 and 897,600 in 2014, with the 2015 number recording 453,900 at the end of June.

The spikes in motor finance during March and September are always very evident thanks to the number plates changeover. The total value of advances for the month increased every year between 2011 and 2014, from £1.1bn to £1.5bn in 2012, £1.9bn in 2013 and £2.4bn in 2014.

The growth rate from the same month in the previous year for the number of new cars bought increased by an average of 23% between 2011 and 2013, while the growth rate for value for advances was 17% in the same period.

The motor finance sector recovered from recession far quicker than any other sector, as growth from the same month in the previous year has been positive since 2011, and has remained above 20% for most of that time.

The 3% fall from December 2014 to January 2015 marked the first month of negative growth in new cars bought for 35 months. The total number of cars sold in March also rose during every year from 2011, increasing from 86,900 in 2011 to 108,500 in 2012, 127,100 in 2013, 154,000 in 2014 and 167,852 in 2015 .

The average monthly growth rate for the same month last year was 15% for the number of cars bought between 2011 and June 2015, which highlights the extent of recovery seen in the motor finance sector since the financial crisis.

The value of advances on used cars recorded similar growth to new cars in the 2011 to mid-2015 period, with the monthly growth rate on the same month a year earlier averaging 13% throughout, while the number of cars sold increased at an average of 11%. The total value of advances rose from £6.4bn in 2011 to £7.3bn in 2012, £8.7bn in 2013, £8.9bn in 2014 and £6.1bn up to June 2015, so it’s certainly set for another year of growth. The total number of cars bought increased from 694,300 in 2011, to 739,700 in 2012, 910,000 in 2013, 1.04 million in 2014 and 582,000 in 2015, up to June.

Demand for and availability of credit

Demand for credit increased significantly during the second quarter of 2015, following substantial falls in the previous three quarters, to finish with a score of 4.5, according to the Bank of England’s (BoE) Credit Conditions Survey.

The reducing cost of credit and the prospect of interest rates rising have created the cheapest environment for borrowing in years, which explains the surge in demand, while the dip in the early part of the year can be attributed to traditional seasonal falls.

Demand for credit has generally increased since 2009 despite regular fluctuations, according to the survey. The BoE survey asked a range of lenders a series of questions, and assigned each one a net percentage balance based on their responses, which were scaled between minus 100 and 100.

The respondents generally felt optimistic towards their demand for credit since the end of 2009, as the score was positive, with only a few exceptions. Respondents reflecting on the past three months identified more fluctuation, which suggests lending conditions have not been as good as these consumers had expected. However, both reality and expectation increased during the second and third quarters of 2014, which reflects the trends in the consumer credit industry.

The availability of credit has generally followed a similar pattern to demand, but its recovery since the financial crisis has been more stable, as the score hasn’t dipped back into negative numbers since turning positive in the fourth quarter of 2012. Unlike demand however, availability did suffer a significant fall in growth in the second quarter of 2015 – dropping from 15.4 to 2.6.

Demand outstripping availability is no great surprise, considering the recent surge in consumer confidence, while availability remained steady.
The net percentage balances of unsecured credit availability looking forward three months dropped to 30.5 in the fourth quarter of 2008, but recovered to post positive results in 2010, 2011, 2012, 2013, 2014 and during the first half of 2015.

Credit availability largely outstripped demand from 2010 up to 2015, barring the odd exception, which suggests that households were more wary of taking on debt than banks were of approving loans.

Economic climate

UK GDP grew by 2.7% in 2014; the fastest growth since 2007. Growth in the final quarter of the year slowed to 0.5%, however, after registering 0.7% over the same period in 2013.

Quarterly growth fell to just 0.3% during the first quarter of 2015, which marked the largest drop since the fourth quarter of 2012.

The economy had been held back by weaker output in the construction, services and industrial sectors in the first quarter, but 1% growth in industrial output over the second quarter drove this growth.

The UK’s GDP totalled £393.5bn in the first quarter of 2015, according to Office for National Statistics data; £800m more than the 2008 high of £392.7bn. The only part of the UK economy to have surpassed the 2008 levels, however, is the service sector, which makes up 80% of the overall economy. The construction, industrial production and manufacturing sectors are yet to reach the mid-2008 levels.

The most significant factor that will affect the lending to business industry in the immediate future is the Bank of England’s imminent rising of interest rates, which will consequently increase the cost of credit. The Office for Budget Responsibility’s most recent economic forecasts (June 2015) predict the rate to rise from 0.5% in the second quarter of 2016. At present, however, people are keen to pay off existing debts while interest rates are low, so repayments may also drop, meaning net lending could remain stable.

Consumer lending growth has outstripped both inflation and salaries consistently since the start of 2014 for the first time since the financial crisis, according to data from the Office for National Statistics and the Bank of England.

This suggests that consumers feel more comfortable taking on credit, which can also be explained by recent rises in consumer confidence. Outstanding consumer credit lending grew by 2.3% from 2013 to the end of July 2014, which represents the largest annual growth since before the financial crisis.

Salaries had also risen steadily, from 0.2% growth in 2013 to 2.1% in 2014 and 1.9% up to June 2015, while inflation fell from a monthly average of 2.57% to 0.1% over the same period, after recording zero and negative inflation every month from February to June 2015, with the exception of May.

Inflation fell below the average salaries increases in July 2014, and has remained there ever since, meaning that wages have increased in real terms since that month.

Food, clothing and oil prices consistently falling since the turn of the year – as well as air fares more recently – have contributed to this low inflation.

Consumers had previously prioritised saving and paying off existing debts over applying for new loans. Annual salary data shows that the average annual salary in the UK increased by 2.5% during 2011, while average consumer lending decreased by 5.1% in 2011. Salaries outgrowing consumer lending indicates that overall debt would have declined during that year. The average monthly inflation rate was 4.4% in 2011, implying there was a reduction in real pay for consumers.

Consumer lending rose faster than salary increases at a rate of 1.6%, which indicates a lower capability to deal with increasing living costs. Inflation remained above salaries in 2013, as it rose by 2.57%, compared to a small increase of 0.2% in earnings.

The Bank of England’s base rate was cut to a record low of 0.5% in March 2009, as part of the monetary policy response to the UK’s deepest post-war recession, and has remained there ever since. This benchmark interest rate declined from a decade-high of 5.75% in November 2007.

The Bank of England is widely expected to raise the rate in 2016, with the Office for Budget Responsibility forecasting the hike to be in the second quarter of 2016, though it’s only predicted to be to 0.75% at first.

Rising interest rates theoretically lead to a rise in unemployment, as companies and banks are less willing to invest, which would in turn lead to a fall in inflation. When the Bank of England dropped the bank rate to 0.5% as an emergency measure in mid-2009, inflation began to increase, before steadying out towards the Bank of England’s target of 2%.

Parliament estimated that 1.4 million UK adults did not have a transactional current account in 2012. Research by Social Finance in 2011 found that of people in the lowest 50% of household incomes, around 330,000 do not have any account at all.

In February 2013, the Parliamentary Commission on Banking Standards highlighted the size and characteristics of so-called subprime customers in its General Background on Big Society Capital:

Three million people are excluded from mainstream credit (source: Community Development Finance Association 2012);
Seven million on lower incomes use home credit, mail-order catalogues, store cards and rent-to-buy from retailers (source: Experian 2011).

Market Outlook

Borrowing is as cheap as it’s ever been and consumer credit is subsequently expected to continue growing throughout 2015.
These conditions will not last for an extended period, however, as interest rates look set to rise to at least 0.75% in the middle of 2016, which will increase the cost of credit.

However, improving economic conditions and consumer confidence should ensure that the consumer credit industry copes with interest rate rises, and continues to grow.

Consumer confidence continues to soar against a backdrop of low inflation and increasing wages, meaning consumers are gradually becoming more prepared to take on credit and take on higher-value purchases.

Timetric forecasts the stock of consumer credit to grow from £168.8bn to £177.5bn at the end of 2015, to £183bn in 2016, £190.1bn in 2017, £196.9bn in 2018 and £204.6bn at the end of 2019, with an overall growth of 19.6% and an average annual growth of 3.9% throughout this period.

Timetric expects the outstanding balances of other loans and advancements to rise by 17.25%, to reach £130.6bn by the end of 2019. It is forecasted to grow from £107.8bn at the end of 2014 to £113.3bn in 2015, £116.8bn in 2016, £121.3bn in 2017, £125.7bn in 2018 before reaching that £130.6bn figure at the end of 2019.

Financial Conduct Authority

The Financial Conduct Authority’s (FCA) role is to regulate the UK’s financial services industry, as well as to look out for the interests of consumers, and it also has investigative and enforcement powers. It was created in the Financial Services Act (2012), and works in tandem with the Prudential Regulation Authority to regulate the banking industry.

The FCA assumed control of the regulation of consumer credit in the UK on 1 April last year. The FCA listed its key priorities for regulating the industry, which are:

• Affordability checks for every credit agreement, to ensure that only consumers that can afford a loan can get a loan.
• All advertisements and other promotions must be clear, fair and not misleading. The FCA will be able to ban misleading adverts.
• Firms that do higher-risk business and pose a greater risk to consumers will face a tougher supervisory approach. Specific rules for the payday sector have been proposed, which include:

1. Limiting loan rollovers to two;
2. Limiting the number of attempts by a payday lender to use CPAs to pay off a loan to two;
3. Information on where to get free-debt advice will be given to every borrower that rolls over a loan;
4. Clear risk warnings to be displayed on all adverts and promotions, along with more information about debt advice.

• Consumers will continue to have access to the Financial Ombudsman Service, but there are currently no plans to include consumer credit in the scope of the Financial Services Compensation Scheme. The FCA will keep this under review.
• A robust authorisation gateway to ensure that any firm or individual authorised to do consumer credit business is fit and proper, and that firms have suitable and sustainable business models.
• Dedicated supervision and enforcement teams will crack down on poor practice, money laundering and unauthorised business. Firms that break the rules may face detailed investigations and tough fines.

UKFS is a business intelligence centre covering all areas of finance in the UK. This passage is an extract from the ‘Consumer Credit in the UK up to 2019’ report. Find this and others, on areas such as retail banking, insurance, in the UKFS online store.