Few countries hold a candle to the U.S. when it comes to loading up on debt to finance retail purchases. But British consumers are certainly learning fast. Thanks to easier credit terms and rock-bottom interest rates, unsecured debt in Britain is soaring, refinancings of home mortgages are way up, and more piggy banks are being cracked as the savings rate falls. Once-thrifty Britons are flashing the plastic with abandon. "Years ago, people setting up homes would save up to buy things," notes Geeta Varma, a veteran staffer at the Consumer Credit Counseling Service in London. "Nowadays, no one says: 'We're saving up for a leather sofa.' They say: 'We're getting one this weekend."'
To see the extent Britain has embraced the debt-financed shopping spree, look no further than the national savings rate, which has slid from above 7% as recently as 2001 to 5.9% in the last quarter. That may be tame by standards in the U.S. -- where the savings rate is a paltry 1.8% -- but it is low for the British. What's more, a recent Bank of England (BOE) study says the country's debt-to-income ratio doubled between 1995 and 2003, to 24%. In the past two years alone, unsecured borrowing has climbed by 24%, to $308 billion. And mortgage debt has risen 30% over the same period, to $1.3 trillion. Some economists warn that the easy credit party could be called off if interest rates jump, if the housing market cools, or if personal income levels dip. "There's a risk of a sharp downward correction," warns Jonathan Loynes, chief Britain economist at Capital Economics, a London consultancy.
So far, however, the borrowing binge hasn't exacted much of a toll. In fact, most observers say it's actually helping to stimulate consumer spending, which makes up about two-thirds of the overall economy. One sign of the boom: House prices across Britain climbed an average of 15.6% in 2003, 25.3% in 2002, 13.8% in 2001, and 9.3% in 2000, according to Nationwide, Britain's fifth-largest mortgage lender. As a result, more and more people have taken advantage of that paper gain by extracting value from their homes. The BOE says "mortgage equity withdrawal" rose to $24.7 billion in the third quarter, up from $20.6 billion in the previous three months. Some observers are convinced the good times will continue for now, citing a confluence of positive factors such as high consumer confidence and faster growth in the U.S. Says Alan Castle, Britain economist at Lehman Brothers Inc. (LEH ) in London: "Consumption growth could surprise on the upside."
But skeptics say Britain is overdue for higher interest rates, slimmer paychecks, and the return to earth of sky-high real estate values, all of which could slow growth and make it more difficult for consumers to pay off their mounting debts. In November, the BOE put through a quarter-point increase in the base interest rate, raising it to 3.75% -- the first such hike in nearly four years. Although many economists forecast that rates will rise at a gradual pace in line with inflation, the central bank is expected to tighten a notch further in February.
OF MOUNTING INTEREST. British central bankers are divided on how serious a problem rising debt levels may be. In a recent report, the BOE appeared to downplay the issue, saying: "The recent growth of unsecured debt has not yet caused wide-scale debt problems." At the same time, one of the bank's deputy governors, Sir Andrew Large, voted to raise rates again at policy meetings in December and January to cool off the borrowing binge. In November, Large warned that "the level of debt to income has risen significantly."
If rates rise further in coming months, that could slow the economy and curtail income growth. But it would be felt most keenly in the housing market. Economist Loynes predicts house prices will fall 20% in the next two years -- which, he notes, "would have a significant influence on household attitudes toward debt." Until then, British consumers seem content to charge now and pay later.
By Laura Cohn in London