LONDON – The highest increase in consumer debt in more than 18 years appears to have helped the United Kingdom’s retail sector, as Britons borrow to buy products ranging from high-ticket electronic items to basics such as milk.
A borrowing binge has taken off in the UK, with credit card activity rising at its fastest pace since March 2004, an increasing number of pensioners using buy-now-pay-later schemes and retailers reporting that many shoppers are turning to financing options. Meanwhile, one British pawnbroker’s loans have struck a record high.
While the overall volume of retail sales slid 1 per cent in December, many stores enjoyed a stronger Christmas than had been expected, and retailers’ shares rebounded in recent weeks after falling sharply for most of 2022. A string of trading updates provided some cheer in a country that is facing a severe cost-of-living crisis with inflation near 40-year highs and recessionary fears swirling.
But the widespread use of credit means there could yet be more pain to come for the sector if customers struggle to service their debt or are forced to constrain their spending at a later stage.
“It is normal for credit to rise at this point in the economic cycle, but we don’t expect it to last,” said Investec economist Philip Shaw. “Once people start hitting their credit card limits and run into difficulties in servicing their debt, this will run out of steam.”
British retailer Next raised its profit forecast thanks to a rise in sales, while the Marks & Spencer Group’s clothing and home division reached its highest market share in seven years. Grocers also benefited, with Tesco, Aldi, Lidl and Ocado all setting records for sales in the approach to last Christmas, and J. Sainsbury guided to the upper side of its profit forecast.
However, a lot of Britons’ spending appears to be credit-fuelled. Bank of England data shows that credit card lending to individuals jumped by £1.19 billion (S$1.95 billion) last November – the highest monthly increase since March 2004. Data for December comes out in February.
Credit cards are not the only product seeing a spike. Electronics retailer Currys reported record credit adoption in the 10 weeks to January with its “point-of-sale financing” – loans that allow customers to split payments over a year or longer – accounting for more than 18 per cent of sales. Almost two million Currys customers are currently using credit, up from about 1.6 million a year ago.
“In a cost-of-living crisis, clearly credit comes into its own,” Currys chief executive Alex Baldock said on a call with reporters. “Credit was growing before the pandemic and the cost-of-living crisis, but obviously it’s grown vastly since.”
Not only big-ticket items such as electronics have benefited from the surge in spending. Data from fintech business Revolut suggested that supermarket spending was up 7.8 per cent in December.
Surveys show that this is at least partly driven by credit, with a quarter of UK adults using credit cards to pay for everyday essentials such as groceries, according to research by Forbes Advisor, a consumer finance portal associated with Forbes magazine.
“Credit cards are a great servant but a terrible master,” Forbes Advisor financial expert Laura Howard said in a note. “That’s why it’s extremely concerning that nearly a third of people are now relying on them just to buy their groceries, while a quarter are leaning on them to fund everyday costs.”
Sales at budget supermarket Iceland grew 14 per cent in the four weeks to Christmas and customer numbers grew by 35 per cent as shoppers sought to save money amid the cost-of-living crisis. More than 10,000 customers used Iceland’s micro-loans in December, which let shoppers pay for food in instalments.
While results from companies in the burgeoning buy-now-pay-later sector, which allows customers to split online purchase payments into three or more instalments, are yet to be released, surveys suggest this form of financing is gaining mainstream popularity.
Money borrowed to pay for Christmas could take years to repay, according to debt advice charity StepChange. BLOOMBERG
