Christmas consumers could be too confident too soon

Dr Dean Garratt is recommending some financial cautious this Christmas to UK households, fearing consumers could be gripped by an exaggerated confidence in the economic recovery.

Dr Garratt is concerned that over-spending during the festive period and willingness by many to shoulder further debts could risk a throwback to the drop in spending that was seen after the financial crash in the late 2000s. He said:

The signs this Christmas suggest that households are feeling more confident than for some time about their existing levels of debt and are prepared to take on even more. This is helping to boost household spending which, after stripping out the effect of inflation, is currently growing at annualised rate of around 2.3 per cent – the fastest rate of growth since early 2008.

It is hard, in my view, to attribute much of the current growth of spending to recent patterns in disposable income growth because in real terms this remains weak. Rather, there appears to be a rising level of confidence felt by many households from the improving overall position of their balance sheets.

We have, of course, been here before and financial confidence is notoriously fragile and prone to exaggerated ups and downs. We saw during the first half of the 2000s how consumption and debt both grew strongly only for consumption to drop like a stone as financial wellbeing deteriorated significantly following the financial crisis. The rational response was for households to consolidate and they did this by increasing saving and paying off unsecured debts, such as outstanding credit card balances.

Following the financial crisis, accumulated debts weighed heavily on the economy. Recently we have seen the impact of what is sometimes called a ‘debt overhang’ unwind. Consumer credit is again growing at rates seen before the crisis. The latest data suggest it is growing at an annual rate of over six per cent. So, in the short run at least, retailers are likely to be happy and it would not be a surprise if we have a plethora of press releases from retailers in the New Year reporting strong sales over the festive period.

The concern for the economy will be if the sense of increased financial wellbeing amongst households generates an unrealistic euphoria as we saw in the 2000s. A little financial caution this Christmas would not be a bad thing all round."