Student Borrowing Fuels Increasing Household Debt

november-24-03The average UK household debt has increased for the first time in five years. Student loans are fuelling a new increase in household debt, with the average UK household £8,159 in debt – the highest average debt figure since the beginning of the financial crisis in 2008.

The figures, which are from PriceWaterhouseCoopers, do not include debt related to real estate such as home mortgages. Total UK non-mortgage consumer debt is £216 billion – an increase of £8.5 billion or four percent of all household debt during the past twelve months.

Student debt is by far the biggest contributor to the higher average household debt figures. The average UK household owes £2,259 in student debt – a reality that has been linked to the Government’s decision to triple tuition fees at universities three years ago.

When student debt is removed from the index, the average level of household debt has remained steady over the past five years. According to a Precious Plastic annual report, the average student that begins university in 2012 will owe £40,000 or more by the time that they graduate.

Due to the significant fee increase, experts believe that young people today are far more interested in saving for university than the previous generation, and far less likely to borrow. Experts believe that the massive increase in debt among students could have significant effects on future borrowing and investment habits.

A large number of UK households are also concerned about their ability to repay credit card bills and other typical household debt. While just 15 per cent of all the people surveyed reported needing to use credit to pay for essential items, over 26 per cent are worried about their ability to repay credit card bills and other debts.

The PriceWaterhouseCoopers report also showed a significant increase in the level of short-term debt, often from online payday loans. Mainstream lenders are expected to respond to the increase in demand for short-term loans with their own offerings in the next twelve months.

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In a recent speech given in Tokyo, the head of the IMF stated that the outlook for the global economy is worse than expected. Christine Lagarde said that the state of affairs around the world is bleak and has extended well beyond the current crisis in the eurozone.

Not only did jobs in the United States not grow as expected, large emerging markets such as China have slowed as well. It had been forecast by the IMF back in April that 2012 would see a growth of 3.5pc whilst 2013 was projected to be at a growth rate of 3.1pc.

Unfortunately, within the past two months many global economies have stalled or deteriorated and as stated, United States and Chinese jobs creation has not met up with expectations. Within the next week or two the IMF is expected to release an assessment of growth which will have been updated to reflect these unexpected slowdowns.

Part of the basis for a reassessment is in the fact that US jobs only grew by 80,000 last month as opposed to the 90,000 which had been projected. Although it was higher than the previous month’s creation of 77,000 jobs, it is much lower than had been anticipated. When large global economies do not produce as projected, this has a dire impact on economies around the world.

Given the fact that this is much lower than the pre-crisis average of monthly growth, it is believed that the US Federal Reserve will implement another stimulus package to try to give the economy there a boost. It appears as though an unexpected rise in jobs earlier in the year gave false hopes and now these new fears are rippling through global economies, especially in the UK and the eurozone.

With Germany standing strong against further help for the troubled EU and confidence down, it appears as though worries for the global economy are well founded. Spain and Italy are the two countries which are currently causing a great deal of concern in the eurozone and France is right there amongst them. Even Germany’s bond yields have turned negative which will probably also be reflected in the IMF’s updated assessment.

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This week David Miles, one of the members of the Monetary Policy Committee, addressed the Society of Business Economists stating that this recession is the worst of any within the past century. He contends that the current recession was caused by a banking crisis said to be the worst in history. In fact, the current recession is indeed 9% lower than the 1973 recession.

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In the words of the BoE governor, Sir Mervyn King, the EU is quite literally “tearing itself apart” and this is having a huge impact on the economy of the UK. Inflation will stay higher longer and it may not be until 2014 that the UK sees itself back to a pre-crisis economy. As a result, the Bank significantly lowered its growth forecast from the previously stated 1.2% to just 0.8% for the year.

Conversely, inflation is expected to stay above the target of 2% at least for the next year which is not good news for households that are already struggling financially. According to Sir Mervyn, the economy will remain slow as well as uncertain and he refers to the current crisis in the eurozone as being a ‘storm’ heading in the direction of the UK.

He goes on to say that the UK has survived the biggest downturn since the 1930’s and that the loss of the eurozone, the UK’s leading trading partner, there will be a huge impact on the economy at home. There is no way to ‘quantify’ what the dissolution of the EU would do to the economy of Great Britain, but it will certainly have a dire consequences.

Although there is no way of telling when this dark ‘cloud’ will move past, again his metaphor, but he has every reason to expect that growth in the UK will indeed recover and that inflation will drop once again. Sir Mervyn then says that Great Britain will be ‘buffeted by winds’ and there is no way to know from which direction they will come, but come they certainly will.

In the end, recovery is made harder because of the uncertainty in the EU, but once the story unfolds, it will be easier to get a grasp on what needs to be done.

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Market news is not good as investors are spooked over recent events in Greece and France. Both countries have been at the heart of the ever-present debt crisis in the EU, but recent events have plunged them even further into controversy. There are still fears that Greece will default and exit the EU whilst the recent triumph of France’s Hollande on an anti-austerity ticket.

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In recent weeks economists had been predicting that the economy would just slightly miss a double-dip recession by a very small growth of 0.1%. Unfortunately, even City economists missed the mark as the shocking news was revealed today that the nation is indeed in the grips of yet another recession.

Although there has been much talk of the potential for sliding backwards into a recession, many consumers don’t quite understand the awful significance of this event. After just having recovered, the UK took a downward turn s the UK GDP shrank 0.3% in the final quarter of 2011 and .03% in the first quarter of this year. This was truly a shock to government as well as economists as they had missed the mark by almost one-half of a percentage point. This is significant that they could have been so far off with their calculations.

So what does this mean for Britons? In effect, a recession is defined as two consecutive quarters of decline in the economy. It looks as though government will try to combat this news with increased fervour in their austerity programme. The public sector will most likely try to cut costs even further which means social programmes are likely to lose even more financing and jobs will be cut by the tens of thousands.

Since Britain’s debt is already at record levels, there is mounting pressures on government. It may still be too early to predict what moves the coalition government will make next, but it is almost certain that they will advance austerity measures on a country already plagued with sacrifice. The Prime Minister admitted that recovering from a recession which is the worst in ‘living memory,’ but the Labour shadow chancellor struck back with an “I told you so!”

Labour has always contended that the austerity drive was ‘self-defeating’ with cuts in spending and taxes rising almost by the day. The party further lashed out at David Cameron and George Osborne who they decry as ‘arrogant’ in their nonchalance when they were warned that austerity would lead the nation back into recession. As those predictions have now proven true, all eyes are on Labour to see if they will finally be heard.

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As recently as two days ago, the BoE was predicting a 0.1% growth in the GDP. However, today a policymaker for the Bank of England is now saying figures ‘could’ show a slight decline in growth. This would place the UK back into a recession, the first double-dip recession since 1975 and it would not be good news for those already suffering from budget cuts imposed by the austerity measures government adheres to.

This could be devastating news for the nation as it finally appeared as though manufacturing was back on track and services were picking up as well. Unfortunately, the growing debt crisis in the eurozone is wreaking havoc not only in the UK but around the globe as well, evidenced by yesterday’s markets.

Although the UK is not part of the single currency, they have been part of the bail out with quantitative easing which means that economic problems on the continent will surely affect Britain. As Holland’s president resigned and Nicolas Sarkozy is probably on the way out, Angela Merkel is continuing her drive for austerity in the EU.

Tomorrow’s data will show if austerity is working in the UK and if it is then Ms Merkel has a valid point. If not, if the UK is plunged into a double-dip recession, this does not bode well for Merkel or Sarkozy who is battling it out in a second round election for his job. No one knows what tomorrow will bring, hope or gloom, but at the moment it is not looking good.

With a turnaround in just 2 days in their predictions, the BoE has everyone waiting with baited breath to see what shape the UK economy is in. It can only be hoped that a recession is avoided as austerity is already crippling many social programmes and killing jobs by the tens of thousands.

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It appears as though once again Greece is on the precipice of defaulting on international loans as less than half of the country’s creditors voted in favour of a £172 billion bond swap. Along with 30 banks in Europe, HSBC, Barclays and the Royal Bank of Scotland voted for accepting the deal but this was not a high enough percentage to pass. In order to be free from defaulting, 95% need to be in agreement and those 33 banks are not enough to keep that from happening.

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Fitch to announce eurozone ratings later this month

Fitch has announced that by month’s end they would release “ratings watch negative” on six eurozone countries which include Ireland, Spain, Italy, Belgium, Cyprus and Slovenia. Each of these countries are struggling to cope with the debt crisis and each has accumulated too much debt, according to Fitch Ratings.

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UK exports suffering from euro crisis

UK factories have been recording the lowest exports since almost two years ago in January of 2010 and it is attributed largely to the debt crisis in the eurozone. In a monthly report released by the CBI, as many as 44% of UK factories reported that their exports were below average for this time of year.

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