Arum’s Managing Director, Aleks Tomczyk comments on the external factors that affect the ability to service debt.
Latest official figures show that the UK economy grew by 0.8% in the first three months of 2014, with unemployment falling to a five-year low of 6.8%.
The pace of the recovery and the resilience of the jobs market from last year surprised some economists. However, headline stats on their own don’t always reflect the wider social issues of our society. They can be interpreted differently depending on which way you look at them, and the impact on individuals and families will be different depending upon their circumstances.
The UK’s recovery between 2009 and 2013 was actually been one of the weakest in the G7 group of industrialised nations.
In the first quarter of this year we still hadn’t caught up with our pre-crisis peak in 2008 – the only major economy other than Italy not to have surpassed this milestone.
Yet during 2013 and at the start of 2014, the UK moved to having one of the fastest growth rates in the G7, with gross domestic product (GDP) up by 3.1% over the year compared with 2.3% in Germany and 2% in the US.
What is clear, as discussed at last week’s Money Advice Scotland (MAS) 25th Annual Conference, is that, irrespective of the wider economic growth stats, many of our households are still struggling to balance the demands placed on their incomes.
MAS played host a really insightful Conference with an interesting speech from Stephen Blackman, RBS Senior Economist, who highlighted that almost all of the UK’s private sector debt is actually held by households.
Businesses account for £382billion of the debt compared to £1.359 trillion pounds worth of debt owed by UK households – £1.2 trillion on mortgages alone.
There are many external factors that can alter the ability to service debt, from changes in lifestyle such as having children, to wider economic factors, such as interest rates.
While the UK interest rate has been held at the record low of 0.5% for another month, the Bank of England is expected to begin raising interest rates in February next year.
The rise is expected to be gradual and the Bank of England will look to ensure a sustainable recovery is ensured, but we have already been warned by some quarters about the shockwaves that even a small rise in the interest rate Richter scale could create – especially when the UK holds £1.2 trillion of mortgage debt.
UK Asset Resolution (UKAR) chief executive Richard Banks highlighted last week “If interest rates rose by 1% then a further 22,000 customers, around 7% of the customer base, might struggle or go to into arrears.” UKAR said it is already increasing efforts to support borrowers who could get into trouble when interest rates rise.
This is a message Arum has echoed for over a year now. That Collections & Recoveries organisations need to plan and prepare now for the impact of an interest rate rise on their operations, systems and costs.
Upfront considerations include operational expenditure impact, due to requiring more front-line staff with advanced training to deal with more complex contact with customers. There may be investment options such as increased systems capability, need to acquire new customer insight and increased use of self-service channels. These enablers will have lead-times associated with implementation, will generally need capital expenditure and should be tied into wider strategies. In addition, there may be a need to look at new forbearance options which will need to be tied back into provisioning models.
There are many factors at play when it comes to debt management and not only do we need to get to grips with the here and now but we need to be prepared for the when and if.