Time to get serious

In the eighteen months since the credit crunch began to engulf the UK economy, where have householders been hit hardest?

In the late nineties, household spending was growing at a rate of over 4.5% year on year. Ten years on, this figure has been reduced to just 1.9%. The fallout from the sub prime lending crisis has forced Britons to transform their cavalier spending habits to that of canny spendthrifts.

The economical volte-face has been driven by a number of factors, primarily rising energy costs, rising grocery bills, exorbitant fuel costs and narrowing credit capabilities. As the cost of living climbs and property values tumble, consumer confidence has wilted.

The big six energy suppliers raised their gas and electricity tariffs by an inflation busting 14% on average during winter 2007/08. These price rises were blamed on skyrocketing wholesale costs and record crude oil prices.

Gas and electricity costs are expected to jump again this summer. According to energy watchdog Energywatch, such are the overheads with which energy companies are grappling, these rises are necessary to prevent the energy suppliers from slipping into debt.

The days of cheap food supply also appear to be a thing of the past, as the cost of an average grocery basket of essential items took a £15 leap from May 2007 to May 2008. These increases are the product of supply problems in key producing countries, mainly caused by bad weather and an increase in the use of land to grow crops for biofuel.

Increasing food prices are forcing many consumers to use emergency payment methods. A spring survey by the Post Office revealed four in ten shoppers were using credit cards to pay for groceries, council tax and utility bills.

However, credit cards have become a precious and (in some cases) unattainable commodity. Banks have become reluctant lenders, resulting in a climate where only applicants with blemish free credit ratings are accepted for credit.

February saw online credit card supplier Egg cynically cull over 160,000 clients, in a move widely perceived as the disposal of unprofitable customers.

The narrowing mortgage market has additionally contributed to UK consumers’ financial woes, with first time buyers effectively excluded from the more competitive mortgage offers. As homeowners’ worries increased, record applications for mortgage debt advice were received by the Citizen’s Advice Bureau.

Leading mortgage providers such as First Direct began to pull their most attractive mortgages altogether during March/April 2008. The Co-operative bank and a number of smaller building societies followed suit, while Halifax raised rates and manipulated its acceptance criteria to punish those who couldn’t afford a substantial deposit.

So what happens in the future? Is the worst of the credit crunch over, as many analysts are predicting? Have we corrected our credit dependent spending enough? Could the next raft of energy increases be the straw that breaks the back of a fickle economy?

I’d love to hear your views.