Thrifty Britons put dent in debt

Having enjoyed the biggest borrowing binge in their history, British consumers are now paying off their near £1.5 trillion ($3.6 trillion) of debt at the fastest rate in at least 15 years, according to the Bank of England.

The data add to fears that the fragile recovery in the economy could be damaged by households' return to thrift. Figures from the manufacturing sector also suggested a setback in the pace of industrial revival.

The Bank of England reported personal debt had fallen for the first time since records began in 1993.

Personal borrowing fell by a net £635 million in July, leaving the total owed by individuals at £1.46 trillion, roughly one year's GDP.

Consumer credit fell £200 million. Despite record low interest rates, redundancy fears and uncertainty seem to have fed aversion to debt.

Brian Murphy, head of lending at the Mortgage Advice Bureau, warned: "The hatches have been well and truly battened down. Consumers, it is clear, are retrenching like never before."

Anecdotal evidence suggests consumers are using the reduction in their monthly mortgage bill to pay off their debt more quickly, rather than spending the windfall, as the Bank and the Government would wish.

Although new mortgage approvals rose again, to just over 51,000, the total value of mortgage lending receded, as repayments exceeded new lending, suggesting protracted weakness in the housing market and that stabilisation in house prices may be linked to a shortage of supply, rather than more fundamental strength of demand.

The Royal Institution of Chartered Surveyors' chief economist, Simon Rubinsohn, said: "The fundamental issue remains the withdrawal of many lenders from the mortgage market over the past year and the reluctance of new participants to play a meaningful role in delivering finance to home buyers."

The Bank also reported a jump in bad debts, blunting claims that the banks are being unreasonable in their lending policies. Write-offs of corporate debt rose by £365 million, or 40 per cent, in the second quarter compared with the first - write-offs on household unsecured debt rose by £250 million.

Such write-offs will further damage bank balance sheets and their ability to lend sufficiently freely to secure recovery. Bank lending to firms fell by £14.8 billion in July, partly a reflection of companies turning to bond and equity markets to raise funds.

The reduction in demand for funds threatens to stymie the Bank's attempts to get the economy moving by boosting the money supply by £200 billion.

The Bank's favoured measure of monetary growth, which strips out lending between banks, showed a 0.6 per cent rise in July, with growth of 3.9 per cent over the year, an improvement over last month's figures but not rapid enough to guarantee strong GDP growth.

Experience in the UK and US in the 1930s and more recently in Japan suggests once a deflationary psychology takes hold, it can be difficult to counter.

There was also slightly discouraging news from the manufacturing sector, where the Markit/Chartered Institute for Purchasing and Supply's monthly survey of confidence and new orders fell back a little.

Rob Dobson, a senior economist at Markit, said: "The recovery is likely to continue, but may become more muted later in the year once the rebound and monetary and fiscal stimuli have run their course."

- INDEPENDENT