Shoppers shrug off slowdown with credit card spree

Shoppers have been stacking up fresh debt on their credit cards faster than at any time in the past three years, according to Bank of England figures released yesterday.

Total net lending grew at an annual rate of 13.7% in May, as households acquired £1.734bn in new debt.

The figures defied expectations that the recent slowdown in the growth of take-home pay would help curb consumer spending.

Borrowing on credit cards alone jumped by £823m, the biggest monthly increase since May 2000, and the figures helped offset a slowdown in demand for new mortgages.

"Today's data confirms that consumers are responding to the squeeze on incomes by relying even more heavily on debt to finance spending," said Simon Rubinsohn, of City brokers Gerrard.

He calculated that the average household now has total debts worth 119% of its disposable income - up from 90% in 1997.

Despite the strength of overall borrowing, a £400m fall in net mortgage lending in May, to £6.9bn, added to evidence of a slowdown in Britain's housing market. The number of new mortgages approved also fell, to 91,000 from 96,000 in April.

The Bank pointed out that the figure was probably depressed by the May bank holidays, which reduced the number of working days in the month.

However, economists said that mortgage approvals had been declining for several months, from 105,000 in January, and could presage weaker house price rises in the coming months. Jonathan Loynes, chief UK economist at Capital Economics, said: "The level of approvals is now consistent with our year-end forecast of house price inflation of about 8%," down from levels of about 20% in May. The latest house price index from the Nationwide building society, due for release later today, could provide further evidence of the property market slowdown.

The Bank of England has expressed concerns about the levels of consumer debt in the past.

With households apparently happy to ramp up credit card borrowing rather than tighten their belts, John Butler, chief UK economist at HSBC, said yesterday's figures suggested debt could pose a risk to economic recovery.

"If, as we expect, weak real wage growth proves persistent, consumers will need to rebuild their balance sheets fairly rapidly," he said.

He warned that a widely-predicted cut in interest rates by the Bank of England could tempt consumers to pile up even more debt, and make the inevitable downward correction more painful.