This is the first of a two-part issue of the ECFIN Country Focus looking at household consumption in the UK. The UK economy survived the global slowdown of recent years relatively well in comparison with many other industrialised economies, its performance underpinned by firm consumption growth for both the household and public sectors - the former supported by a period of rapidly rising house prices and facilitated by growth in household debt. With the Bank of England having raised interest rates to dampen emerging inflationary pressures, this Country Focus assesses the possible threat to consumption from the accumulated burden of debt.

The note argues that despite the much larger levels of debt now observed, the UK is significantly less vulnerable to higher interest rates and debt servicing costs than it was in the major recession in the early 1990s, and any house price falls would seem unlikely to cause a repeat of the debt problems then experienced. Risks remain, however, particularly in the exposure of some lower-income households – though continued strength in the UK’s labour market should mean that the wider economy is likely to be insulated from any adverse effects arising from this exposure.

The second and concluding part of this issue will provide a companion analysis, analysing the impact of house prices on consumption via wealth channels.