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Could consumer debt prompt a fresh banking crisis ten years on?
A decade on from the banking crisis that plunged Britain into recession, leading insolvency experts are warning that consumer debt could again be on the brink of a major crisis.
Latest figures from the Bank of England has clearly shown that much of the current economic recovery appears to be built of consumer spending.
And recent reports that a rise in interest rates could happen before the end of 2017 could mean that consumers become more cautious – and prompt a fresh financial crisis for a country already worried by the impact of Brexit negotiations.
For many years, income growth has been lower than inflation, which actually suggests people have less disposable income rather than more. It stands to reason, therefore, that the consumer spending boom most have been have been fuelled by additional credit agreements, a suggestion that is backed up by official statistics.
Interest rate rises spell trouble for borrowers
What this means in real terms is that individuals are at risk of getting into problems with repaying their creditors if, has been suggested, interest rates do start to increase. Any rate rises would be a good thing for savers but could be disastrous for spenders.
It is also likely that any problems at an individual level would most probably also be mirrored on the wider scale. If individuals get into financial difficulties, they generally reduce their spending, which in turn reduces demand for the kind of goods and services that businesses need to sell to be able to survive.
It seems likely that there is going to be some sort of adjustment over the coming months and if that leads to a consumer debt crisis then there will inevitably be an effect on the commercial sector too.
While ever interest payments remain low, that helps people to maintain repayments but it’s a fragile structure and if people are close to the knife edge will they have the spare cash available for increased payments if there is a rise in interest rates?
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