Debt hangover in UK / Economist

How much longer can Austin Powers keep his buying spree alive..... ?

Man fragt sich wirklich wie lange die Briten dieses Tempo weiter aufrecht erhalten können?

Inflation is back, however. Retail prices rose by 4.8% in the 12 months to March, the most for almost 16 years. That surge in inflation, driven by higher home-energy costs, is now receding as gas and electricity prices come down. But underlying inflationary pressures remain uncomfortably strong because the long period of sustained growth has left the economy operating close to its capacity.

The Bank of England has responded with some unpalatable medicine for borrowers. Since last summer the bank's monetary-policy committee has raised the base rate from 4.5% to 5.5%. Four of the nine rate-setters wanted a quarter-point rise this month, according to minutes published on June 20th. This suggests that an increase to 5.75% in early July is highly likely. The City is pricing in another rise after that, taking the rate to 6.0% by the end of the year, and there seems little chance of any easing in 2008.

Household budgets have already been squeezed hard in recent years by rising taxes and higher inflation. Real disposable income grew last year by just 1.3%, the slowest since 1982 and less than half its average rate in the past two decades. So far this year, retail-price inflation has outstripped increases in average earnings, leaving workers worse off.

Some relief will come over the next few months as inflation subsides. Treasury forecasts also suggest a more moderate rise in the exchequer's take from income taxes in the year ahead. But now household finances are being strained by the remorseless rise in interest rates. People who took out two-year fixed mortgages at low rates in 2005 are facing a particularly painful shock as they absorb the full increase in borrowing costs over the past year

According to Morgan Stanley, an investment bank, debt-servicing costs are at their highest as a share of disposable income since the recession of the early 1990s (see chart). Mortgage borrowers used to get generous tax relief on their interest payments but this was phased out during the 1990s and abolished in 2000. When this is taken into account, the debt-servicing ratio is close to its previous peak when the base rate stood at 15%. The borrowing binge of the past few years explains why people are having to shell out so much even though interest rates are still far lower than in the early 1990s. Since 2000 household debt has soared from 110% of disposable income to 160%. Taking on bigger loans seemed affordable when credit was cheap. But now borrowers are saddled with higher debt repayments and are vulnerable to relatively small increases in interest rates.

The heavier burden of debt-servicing costs will constrain consumer budgets over the next year or so. Furthermore, although house prices are still rising fast—they increased by 11% in the year to June, according to the Nationwide building society—higher interest rates should eventually cool the market. As this happens, consumers will be less ready to borrow against the value of their homes in order to maintain their living standards.

The willingness of households to pile up debt buttressed the growth in consumption and overall demand during the past few years. In effect, however, it brought spending forward. Now the danger is that consumers will have to retrench, leading to a nasty economic slowdown.