FT on risk no consumer debt

Looks like recoveries might be about to fall if P2P start paying their share of advice, might make consumer P2P less appealing.

Final sentence is wrong/unclear. ONS said that households spent £900 more than they earned and they borrowed or withdrew savings to cover this.

 

UK household saving rates have been falling since 2010 and finally went negative in 2017. The chart below, which shows sectoral balances (as % of GDP) show how they have fallen



Conservation of cashflows means the sum of government + corporate + household + rest of world = 0. Given the rest of world has been a positive (we run a current account deficit, hence we have a capital account surplus), then the others must sum to a negative. Typically the government runs a fiscal deficit (a negative sectoral balance) so this allows households to run a surplus and save. As the government implemented austerity, however, this reduced the fiscal deficit. Given corporates refuse to invest more (economic uncertainty, Brexit, shareholders prefer share buybacks/dividends), then to balance up the equation, households savings started to fall. Now households are going into debt at an increasing rate to pay for the current account deficit.

So it's a pretty grim outlook for UK households (includings SMEs) unless something changes. I'd compare this to US consumer debt where because the current account deficit is smaller the overall sectoral balance is less extreme. Moreover, US government has been far less ideologically opposed to fiscal stimulus. As a result the consumer debt position, while still worrying large, is at least not going into a rapid descent like the UK.

"We're doomed Mr Mainwaring Sir, We're doomed" ....

Would investing in that industry be the best hedge available?

To relate this story to P2P consumer debt, these charts are illuminating (see below, source AltFi data). On the top chart we have Zopa Bad Debt rates for their loan cohorts from 2011 through 2016. This chart is from late 17 so there is no data for the 2017 cohort. We can see that the bad debt rates were unchanged over 2011-13, started to rise in 2014 and spiked further in 2015-16. This is not due to changes in the mix of loan grades since this pattern is repeated inside specific loan grades. The rise in bad debt is possibly coincident, once measurement lags are taken into account, with the sharp fall in the household sectoral balance from 2015 (chart in prior post by me in this thread).

The second chart is Zopa's 12-month trailing net return to lenders (net of fees and loss given default). The net return is now below that observed in 2007. In the financial crisis the rise in bad debt rates on Zopa was offset by higher yields hence 2007 was the actual low in returns, if not in defaults. Since 2015 we have seen rising bad debt rates without the corresponding rise in yields, hence returns are now at all time lows. Hence my view that when some commentators point out that Zopa survived the last crash, this statement is not pertinent to how P2P behaves in the next crash. The behaviour of the Zopa loanbook of 2008/09 is in no way indicative of how it will behave in 2018 and in fact returns are already worse than observed in the financial crash.