In the face of rising prices and stalling wages, households are seeing their spare cash reserves dry up. So why have surveys revealed an increasing confidence in personal finances – and could it be the start of another debt crisis?
How are you feeling about your finances?
Political headwinds have rocked the economic boat over the past two years, with prices rising as productivity slumped and wage growth stalled.
But despite all this there are indications that the public mood remains buoyant – sparking concerns that people are borrowing more in order to maintain their standard of living.
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The Office for National Statistics' (ONS) economic well-being survey revealed real household disposable income fell by 2% year-on-year in the first three months of 2017 – the largest decrease since 2011, driven by rising prices for goods and services.
Naturally, this has affected spending, with both the British Retail Consortium and KPMG recording decreasing outlays on non-essential items and big-ticket items as consumers funnel scarcer resources into food and fuel.
However, this does not seem to have dented people's confidence in their personal finances, according to an ONS survey which says consumers reported 'an improvement in their perception of their own financial situation and the general economic situation' over the past year.
Surveys from the likes of Lloyds Bank have also revealed a steady confidence in the wider economy, despite inflation and the continued depression of interest rates.
Analysts are concerned this apparent conflict between falling income and rising consumer confidence could actually be more of an indication of consumers' confidence in their ability to borrow – a potentially worrying trend for the future.
Bridget Buttinger, a board member at Norwich Credit Union, said these feelings of stability could be fuelled by a desire to keep up appearances.
'People are trying to maintain their standard of living without the same amount of disposable income, and ultimately that will mean they borrow more,' she said.
Average household unsecured debt - ie excluding mortgages - reached £13,200 at the end of last year, almost at the adjusted-for-inflation level of £13,300 prior to the 2008 crash.
The ratings agency Moody's has this week warned that rising borrowing levels at a time of economic uncertainty could lead to defaulting on loans, as the Bank of England reported that consumer borrowing had topped £200bn for the first time since the financial crisis.
Ms Buttinger said the savings and loans organisation had seen a rise in the amount it was lending, but this correlated with a rise in membership numbers – now standing at just over 900.
'The first thing we do is encourage people to save,' she said. 'We definitely deal with some people who are only just managing. The warning signs for individuals are that they have to keep borrowing to repay their loans.
'We are not in the business of lending to people who can't pay us back so we try to nip that in the bud, but we see some individuals who are not able to reach an equilibrium.'
David Potten, acting chief executive of Citizens Advice Norfolk, said while there had been no noticeable rise in people seeking help from the organisation for debt-related issues, the numbers had not declined either.
Debt-related problems account for 35-40% of the organisation's workload – of the 7,000 clients it saw in Norwich alone last year, 1,600 had debt issues.
Credit card, charge card and store card debts account for around a quarter of all debt-related enquiries, with bank and building society overdrafts, unsecured loans and catalogue or mail order debts making up another quarter.
Mr Potten believes people need to be better educated about the kinds of debt they take on – particularly on their cards.
'One thing we find particularly worrying is that people do not realise these are not priority debts: they can be negotiated by an adviser.
'Many are so worried about their debts on cards that they prioritise making the minimum monthly payments rather than buying food,' he said.
Mark Curtis, partner at East Anglian accountants Larking Gowen, said: 'It is the spending on unsecured debt – which tends to be at higher interest rates – that causes more concern and is on the increase. Given that wage inflation has been low for over a decade, and shows little sign of picking up in the short term, how is the increasing debt going to be financed and repaid?'
Financial state
Financial uncertainty over the past year has caused one economist after another to warn that consumers are 'feeling the pinch'.
Consumer confidence has fluctuated since the Brexit vote, but this month returned to lows not seen since the vote's immediate aftermath, following a dive after June's general election.
In May the Chartered Institute for Personnel Development anticipated that pay rises for thousands of workers be pegged at 1% in the coming year. Combined with rising inflation, this would mean a 'significant' number of people would see a fall in living standards, the CIPD said.
Growth in gross domestic product (GDP) has been on a downward slide since the back end of last year, nearly stalling at 0.2% in the first quarter and barely making a comeback at 0.3% in the second. This is due in part to trouble in the services sector and spiking inflation – at 2.7% in April, 2.9% in May and 2.6% in June.
Is education the key?
Insolvency specialists have warned of the growing need for personal finance education in schools - but debt charities say that classroom lessons will not solve the problem.
Corporate restructuring group R3 found that just 10 of British adults say they have received useful advice about personal finance through their school or college.
R3 Eastern chairman Mark Upton, a partner at Ensors Chartered Accountants in Ipswich, said: 'Learning good financial habits, including budgeting, saving and using credit products responsibly at an early age, will help [young people] to negotiate independent adult life in a savvy and resilient way.'
But Mike Lamb, an adviser at King's Money Advice in Norwich, which advises people on problem debt, said that risked missing the point.
'The people who are in debt that we deal with are not generally in that situation because they are ignorant - it is because of particular circumstances that have happened to them: they've lost a job or a relationship and their income has changed.
He added: 'There are people who are just struggling - things are getting tighter and tighter every month and they can't cope any more.'
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