Households add to debts and demolish savings to fund Christmas

Despite subdued levels of spending across the year, household debts are now rising and savings are shrinking as Christmas approaches.

Lower spending has slowed the recovery throughout 2011, the Bank of England’s recent Quarterly Bulletin has found, with many households facing tough financial conditions. Consumers had been prioritising mortgage payments and servicing their credit card debts.

But December seems to have changed the complexion of consumer activity at a point when the state of household finances is worsening at an increasing pace. The Markit Household Finance Index shows that real incomes have fallen at their fastest rate in over 2 ½ years and that families are adding to debts and ploughing through savings to fund their Christmas.

Though households are refraining from major purchases, almost twice as many have reported an increase in spending (38%) as those who reported a decrease (20%). 22% have reported higher debt levels, compared to 15% who reported lower. A third of respondents have reported a fall in savings in December compared to just 8% that reported a rise.

Many have had to respond to fiscal measures by working extra hours or taking on a second job. The Markit survey saw 38% of the 2,000+ surveyed families report that their financial situation had deteriorated over the month, and 49% expect to be in a worse position still by the end of 2012.

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Ashley King