The implication of changes in consumer borrowing

The growth in UK consumer borrowing falls to 9.8% in July. Consumer borrowing includes overdrafts, credit cards and car finance. When there is an increase in the consumer borrowing growth rate, it shows the confidence in the market. People are actually borrowing from their future incomes to spend on their today's consumption in order to improve their current living standards. Normally people would love to have stable and constant living standards, and they would try to avoid having worse living standards in the future. Once they spend more than their earns nowadays, their living standards are improved above the levels they currently are able to afford without borrowing, in order to avoid having worse living standards in the future, their future incomes have to not only higher than the current income levels, but also have to afford the current debts and maintain the current living standards.

A rapid growth in the consumer borrowing can easily lead to higher inflationary pressure in the economy, as more consumption is made and more revenues are earned by banks. However, there is a danger when the price is continuously increasing faster the wage level. Once the price level is increasing, it means people need to spend more for the same goods and services in the future than nowadays. When people are measuring their abilities to afford debts and good living standards in the future from today's value, it is highly likely for them to overestimate their wage increases and underestimate the inflation. Once such thing occurs, many people could face bankrupt or at least they would have to adopt austerity for their ordinary living. Once they start to find they are struggling to pay back their debts, it is normal to see a sharp decrease in the consumption, when a significant proportion of people face similar situations.

Therefore, a rapid growth in consumer borrowing is likely to lead to a bubble in our economy. Unlike other bubbles, it may not cause a finanical crisis, but cause a general austerity environment in the economy and pulls down the consumption sharply and forces the economy back to a recession.