October 29, 2012 / 9:37 AM / 7 years ago

Rebound in consumer credit boosts growth prospects

LONDON (Reuters) - Lending to British consumers rose at the fastest pace in more than 4-1/2 years in September, adding to signs that the economy is slowly picking up after exiting recession in the third quarter.

A pile of one pound coins is seen in this file photo. REUTERS/Toby Melville

Although one-off factors were partly responsible for 1 percent growth in British output between July and September, data showing lending to consumers rose last month for the first time since June suggests the underlying economy is expanding at a modest rate.

Consumer credit rose by 1.199 billion pounds in September, the strongest rise since February 2008 and well above analysts’ forecasts for 0.13 billion pounds, Bank of England data showed on Monday. The upturn was driven by a 893 million increase in overdrafts and loans.

Howard Archer, economist at IHS Global Insight, said borrowing might have been boosted by earlier spending on Olympic and Paralympic tickets and visits, while consumers might also be growing more confident due to rising employment, lower inflation and better pay growth.

“If consumers are becoming more prepared to spend ... then there is a real chance the economy can continue to grow following the third-quarter rebound in GDP,” he said.

Mortgage approvals rose to 50,024 in September, from 47,921 in August and beating forecasts for 48,500, while mortgage lending grew by 491 million pounds, also more than expected.

However, monthly mortgage approvals are still running at a little over half levels seen before the 2008 financial crisis.

BUMPY ROAD

Archer said that the latest data made it less likely that the central bank would approve another round of quantitative easing asset purchases in November.

“Even so, recovery still looks likely to be gradual and bumpy,” he added, chiming with earlier cautious comments by two central bankers.

Economic growth in Britain will be “materially” lower in the fourth quarter, after an unexpectedly strong boost from the Olympic Games, and will remain weak for the next couple of years, BoE chief economist Spencer Dale said.

On Sunday, BoE deputy governor Charlie Bean said there was “reason for some optimism” going forward, but warned that growth could be weak in the fourth quarter.

The central bank is pinning great hopes on a new scheme to get credit flowing to households and business, which provides cheap funding to banks if they keep lending.

Rate-setters have cautioned, however, that it would be several months before the effect of the scheme, which started in August, was visible.

The BoE’s preferred gauge of money supply - M4 excluding intermediate other financial corporations - rose 0.3 percent on the month after a 0.5 percent increase in August, taking the annual growth rate to 4.2 percent.

“The thing that really caught my eye (is) the continuing strength of M4,” said Brian Hilliard, economist at Societe Generale. “Finally we’re beginning to see a little more perkiness in the money numbers.”

Additional reporting by Stephen Eisenhammer; Editing by Susan Fenton

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