Caution is advisable as debt and spending power rise

Disposable income in the average UK household rose again in 2015-16, and consumers are expecting to be even better off this year. But as attitudes shift from austerity, there are some signs that continued caution is the way to go.

Improving economy

Disposable income in the average UK household rose by £564 in 2015-16, according to the Office for National Statistics (ONS). And the PwC Consumer Sentiment Survey found that 25% of consumers expect to have even more disposable income in 2017 – an increase on the number of optimists last year.

PwC director Kien Tan states that the stats show the “falling unemployment and the National Living Wage being reflected in many people’s pay packets”. Resolution Foundation chief economist Mark Whittaker also attributes the improvements to “low inflation and rising pensioner incomes over recent years”.

Rising debt

One of the side effects of these improvements, is that people are taking on more debt in the belief they’ll be able to pay it off as the positive trends continue.

Research by the Trades Union Congress (TUC), based on ONS figures, recently revealed that the average UK household has debts of £12,887, excluding mortgages. That equates to 27.4% of average household income – the highest number in eight years.

Risk factors

Although many households are borrowing within their means, there’s a risk that any change in the economic situation could hit vulnerable borrowers. As Money Advice Trust Chief Executive Joanna Elson points out:

“If the economy does indeed suffer in 2017, this borrowing could become more difficult to repay, and some households risk finding themselves exposed to sudden changes in financial circumstances."

Risks include the potential for rising unemployment as a result of problems during Brexit or the falling value of the pound and an increase in the cost of living. Equally, if the Bank of England increases interest rates, the cost of debt repayments will rise.

As a result, consumers should manage their debt wisely, paying off as much as possible as early as possible and keeping an eye on their outgoings until the economic situation becomes more stable.

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