Personal debt hits record high

British households have ignored rising concerns about the health of the economy and taken advantage of low interest rates to stack up a record £700bn in debt, it emerged yesterday.

Despite the deteriorating international outlook and a warning earlier this month from the Bank of England that borrowers could find themselves in trouble if the economy slows sharply, the average British household owes more than £5,300, on top of their mortgage.

City analysts said consumers appeared oblivious to the global downturn. "If the economy is slowing it seems that no one bothered to tell the consumer," said Jeremy Hawkins, chief UK economist at Bank of America.

With borrowing rates at their lowest since the early 1960s, households are taking a relaxed view about their debt burden.

The Bank of England said total lending rose by £6.14bn in July, the highest figure since records began in 1993. Credit cards and personal loans rose by £1.7bn over the month, to a level 12% higher than a year earlier. Home loans rose by £4.45bn, also a record.

Last month's borrowing spree came as fears rose of more job losses in the financial services sector and in manufacturing. However, despite the number of firms announcing large-scale layoffs, unemployment is still falling. Official figures showed that the jobless total dropped by 12,500 in July.

"There's doom and gloom out there in terms of particular sectors and there's doom and gloom in newspaper reports, but consumers are being completely unaffected by the global slowdown," said John Butler, UK economist at HSBC. "It needs interest rates to jack up or unemployment to rise - if neither happens, then the borrowing will carry on."

The persistence of the feelgood factor despite the global slowdown was underlined by the consumer confidence figures which showed that households are more positive about their personal finances than at any time since the survey began in 1982.

"Interest rates are almost down to their lowest levels since the 1960s, unemployment is at a 30-year low, and house prices are taking off so there is no reason why consumers shouldn't be confident," said Mr Butler.

Rising property prices are bolstering household optimism. House price inflation is back in double digits, and although mortgage lenders believe that it has peaked, the Bank of England data suggest the boom could continue for some time yet.

A record £14.9bn worth of mortgages were approved last month while the number of new mortgages reached 110,000 - the highest since the housing bubble of the late 1980s. The three month lag be tween mortgages being approved and hitting the housing market suggests the current boom may persist into the autumn, promising further price rises for home buyers.

"The numbers are consistent on the face of it with house price inflation rising to 15% or so," said Jonathan Loynes, of Capital Economics.

Yesterday's figures will set alarm bells ringing at the Bank, whose nine-strong monetary policy committee meets next week. The MPC is counting on consumer spending to slow down in the second half of the year, to make room for the government's boost to public spending.

With Britain's manufacturing sector formally in recession and exporters still handicapped by the persistent strength of the pound, large sections of industry have made repeated calls for a further cut in interest rates to stave off further job cuts.

But the worry amongst policy makers now is that any move which made borrowing even cheaper would inevitably risk reigniting inflation.

"None of this will sit well at next week's Bank of England meeting, and these data must significantly dent hopes of rates coming down then," said Jeremy Hawkins, chief UK economist at Bank of America.

But while upbeat about their own prospects, consumers are less sanguine about the wider outlook, with confidence in the economy at its lowest level for almost three years.

An increasing number are also expecting unemployment to rise in the coming months - a key determinant of whether the level of borrowing now being run up will become unsustainable in the future.

Household debt, including mortgages, has risen to around 110% of disposable income as a result of the borrowing splurge, up from 94% at the beginning of 1998, although low interest rates have been holding repayments down.

"Servicing costs are, of course, considerably lower than at the end of the 1980s (after the last borrowing feast)," said Simon Rubinsohn, of City brokers Gerrard.

"But this will provide little comfort for households if unemployment does turn upwards towards the year end," he added.