The total amount of UK personal debt has exceeded the country's entire GDP for the second year running.
According to the accountants Grant Thornton, the total amount of outstanding debt amassed through mortgages, loans and credit cards rose by 7.3 per cent to £1.44 trillion over the year to June 2008, up from £1.35 trillion the previous year. UK GDP is estimated to be £1.41 trillion, having increased by just 5.1 per cent in nominal terms over the past year.
The survey shows that Britain's appetite for debt does not appear to be easing, even as the credit crunch has made new loans harder to come by.
The amount of borrowing has soared in recent years due to a prolonged period of low interest rates. However, there is some evidence that a growing number of consumers are now struggling to meet their payments. Levels of home repossessions have risen sharply over the past year, while banks have reported a rise in the number of customers defaulting on personal loans.
Stephen Gifford, Grant Thornton's chief economist, said: "Despite the global downturn flattening the growth of personal debt and UK GDP over the past few quarters, debt levels continue to grow at a faster rate than the income the UK generates. Although there is no cause for panic as personal debt is well covered by the UK housing stock, the figures clearly illustrate the continuing problem of growing personal debt levels in the UK. If the property market and economy continue to weaken, the current levels of personal debt will become unsustainable and there will be a marked increase in personal insolvencies."
House prices have already fallen around 10 per cent over the past year, wiping almost £400bn off the total value of housing stock.
Although repossessions and personal insolvencies have so far remained at relatively low levels, Mr Gifford said he expected the numbers to increase over the coming year.
"Typically, there is a lag between individuals facing tough financial circumstances and when they become insolvent," he said. "It will be the next six to 12 months which reveal how seriously the credit crunch has affected individuals."
If credit remains hard to come by, it is likely that consumers will be forced to start paying down their debts over the coming year. Already, it has become difficult to remortgage if you do not have at least 10 per cent equity in your home.
However, Mr Gifford pointed out that any wider move to reduce debt would affect the speed at which the UK economy grows.Reuse content