What Does the Household Debt to GDP Ratio Tell us About the UK?

Despite the fact that Prime Minister Theresa May has finally emerged from the Brexit negotiations with a withdrawal bill, the uncertainty surrounding the UK’s exit from the European Union has never been more troubling.

With the nation also woefully underprepared for the reality of a no-deal Brexit, the short and long-term future of the UK undoubtedly remains in the balance at present.

However, the household debt to GDP ratio in the UK has improved steadily since the EU referendum vote, while it’s also far lower than the dark days of the Great Recession in 2010. But what exactly does this metric tell us about the UK’s economy?

What is the Household Debt to GDP Ratio in the UK?

As of March 2018, the household debt to GDP ratio in the UK was recorded at 86.10%, with this figure having declined previously in relation to the previous quarter.

This rate has also declined incrementally from the recent peak of 86.7% in June 2017, with the growth of consumer borrowing and the demand for lenders like Likely Loans having fallen slightly during the last year.

From a global perspective, the UK’s household debt to GDP ratio is also relatively healthy, coming in lower than progressive and developed economies such as Canada, New Zealand, Australia and Switzerland.

In simple terms, this means that the average UK household is carrying debts that are less than their total income, with GDP referring to the combined value of goods and services produced on a national scale (including wages and economic output).

What Does This Tell us About the Economy?

In order to understand the impact that this has on the UK economy, we need to imagine a scenario where a country’s household debt to GDP ratio exceeds 100%. This applies to nations like Denmark, and in this instances households are spending more than they earn on a monthly or annual basis.

This is typical of large and fast-growing populations, where the demand for big-ticket items such as cars and houses remains high. Similarly, this may also hint at a scenario in which the rate of inflation is significantly higher than the national wage, making households unable to cope with the demands of a spiralling cost of living.

So what does this tell us about the UK economy? While the nation’s household debt to GDP rate remains lower than 100%, it still accounts for a significant amount of income and annual earnings. In the case of the UK, this rate has undoubtedly been influenced by a dramatic shortage of skilled construction workers and housing, which has triggered in imbalance between supply and demand and sent to price of property soaring.

We should also not be surprised to learn that the rate of inflation in the UK rose unexpectedly in August to 2.7%, with this remaining higher than national wage growth.

Overall, we can see how various economic factors have contributed to a household debt to GDP ratio in excess of 86%. This still remains relatively healthy in the current economic climate, however, while the government in the UK has also sought to control this figure by manipulating the base interest rate.