Borrowing 'threatens UK economy'

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Consumers must rein in their borrowing levels if a downturn in the UK economy is to be avoided, a report has warned.

The Ernst & Young Item Club's latest report says that the strong UK economy rests upon shaky foundations, with excessive levels of household debt posing a serious threat.

It states that through mortgages, credit cards and other loans, borrowers have racked up £1.3 trillion in debts, putting the long-term stability of the UK economy in jeopardy.

"The problem is that we are now becoming a little bit too confident and the lenders are relaxing their criteria and we're all gearing up appropriately," the Item Club's chief economic adviser, Peter Spencer, told BBC Radio Five Live.

"Of course that's great in the short term but for the longer term it does pose risks.

"We are borrowing to finance our consumption and of course we're doing that at a time when the economy and everything else, our personal finances, are looking pretty sweet. The worry is what happens to our own finances when things turn sour."

He explained that although today's quarter-point interest rate hikes dwarf the full percentage point increases of the early 1990s, the size of today's £1.3 trillion debt means its "leverage and impact" is potentially as great.

Mr Spencer also suggested that with younger homebuyers lacking first-hand memory of the property crash in the early 1990s, the housing market could prove an indicator of what may be to come.

"There are some very clear warnings of course on the other side of the Atlantic where they've had a similar borrowing binge and they've got serious problems with sub-prime lending, which looks as if it could spill over into the rest of the mortgage market," he said.

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