Consumer credit shows rise despite high street gloom

Consumer credit extended by Britain's main banks rose more in July than at any time since the start of the 1990s. But it remains unclear whether this marked a return of consumer confidence or signalled distress borrowing.

Two years ago, consumers were repaying debt, even though consumer spending was picking up nicely. But since the end of 1994, consumers have been consistently ready to borrow, even though the rate of growth in consumer spending has tailed off.

Indeed in the first quarter of 1995, consumer credit grew by over pounds 500m at a time when spending fell back from the previous quarter, the first such decline since the end of the recession. The increase in borrowing has built up even more since then, despite weak sales on the high street.

The most likely explanation is that as consumers flinch from entering or trading up in the housing market, they are becoming more prepared to enter into smaller-scale borrowing. With credit card advances rising by over pounds 100m in July, the summer sales may also have contributed to the jump in personal credit.

There is a similar uncertainty to the increase in borrowing by industrial and commercial companies, which were also repaying debt until recently. In July, British banks lent them over pounds 500m.

This may be a less positive development than it seems. At least part of the increase appears to be financing an unplanned build-up of inventories, with wholesalers and retailers increasing their borrowing by pounds 160m.

Provisional estimates from the Bank of England showed a jump in bank and building society lending in July of pounds 6.9bn, double what the market had been expecting. However, distortions including Lloyds Bank's purchase of the Cheltenham & Gloucester Building Society meant that the market in effect discounted the increase and its effect on raising M4 growth to 8 per cent rather than the 7 per cent forecast.