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How the UK Economy Affects People in Debt

Written by on 5 October, 2010

People throughout the United Kingdom are spending far more than they earn each month due to the rise in unemployment, a recent report has found. The Debt Dashboard is a quarterly publication produced by the Consumer Credit Counselling Service (CCCS). Its findings are based on the provision of data from over 90,000 UK residents. Their second quarter report focuses on the immediate consequences of debt and how the wider economy is being affected during the economic crisis.

While continuing deflationary pressure in the UK economy has ensured that Bank of England base rates has stayed at 0.5%, both the Consumer Prices Index (CPI) and the Retail Price Index (RPI) have continued to fall during the second quarter of 2009. The CPI has fallen to below 2% while the RPI is negative one percent.

Although this should mean consumers benefit from lower prices, food prices have remained stubbornly high. Some homeowners with mortgages have benefited from low base rates, but not those who are in fixed-rate mortgages. Not all banks have passed on the full extent of reductions to customers.

Largely due to Nationwide’s house price estimate, the median house price has increased by £6,773 during the second quarter. More interestingly, all other house price estimates have fallen.

The rate of mortgage approval has risen with the first 6 months of this year totalling 250,000 approvals. In contrast, the final quarter of 2008 had just 92,000 approvals. This is indicative of both greater market liquidity and a greater willingness of first-time buyers to enter the housing market.

The Home Builders Federation has stated that approximately 60% of its members have reported an increase in sales activity comparative to this time 12 months earlier. However, the affordability ratio remains at a six-year low of 7.1.

Arguably the most damaging effect of the recession has been rising unemployment. At the end of June 2009, there were 2.4 million unemployed. It is widely predicted that this figure will exceed 3 million by the end of this year.

Equally concerning, there was a marked decrease in the unemployment vacancy ratio. This appears to have more than halved during the last 2 years to just 18.3%. A growing number of employees are being forced to choose between unemployment and reduced or part time hours. This clearly has a dramatic effect on levels of personal debt as families continue to struggle to make repayments each month.

Whilst the Council of Mortgage Lenders (CML) has reduced its predictions with regard to the number of house repossessions, it still expects there to be 65,000 during 2009. Whilst 10,000 lower than its original prediction, it is still almost 50% higher than in 2008.

Despite an increase in credit card lending of almost £2 billion, unsecured debt has fallen for the fourth successive quarter. Whilst this may appear positive, it is indicative that most banks remain reluctant to lend customers money. This could potentially hold back economic recovery.

The global economic downturn has had a particularly devastating effect on both homeowners and those with high levels of unsecured debt. Unemployment, reduced opportunities and shorter working hours have made it increasingly difficult for many families to keep-up with debt repayments. Those in the United Kingdom suffering with rising personal debt are urged to seek debt advice.

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Related content:

1. Home Affordability Improves
2. Unemployment affects the finances of families
3. Cost of Home Ownership Falls
4. House Prices Show Signs of Recovery
5. Global financial crisis hits UK families