Double blow for UK firms as rates stay high, consumer spending falls

Full impact of borrowing costs yet to hit amid dim prospects for country’s growth

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LONDON - Britain is facing a "double whammy" as higher-for-longer interest rates begin to bite, with the country particularly vulnerable to a pullback in consumer spending and knock-on consequences for corporate debt.

The Bank of England (BOE) warned this week that the full impact of elevated borrowing costs has yet to fully pass through, although about two-thirds of British adults have already cut back on discretionary purchases and retail sales are almost flat by volume.

More households are also turning to credit card debt, which is growing by double digits annually.

The country's weak level of investment puts more weight on consumer spending, said Professor John Van Reenen of the London School of Economics.

"This becomes a double whammy because UK rates have risen more sharply and Britain relies more on consumption," he added.

"These heavy chains are pulling down our growth prospects." Strong growth would help firms grappling with higher borrowing costs to boost revenue and service their debt.

Instead, Britain is expected to remain stagnant, with the International Monetary Fund slashing its forecast for next year from 1 per cent to 0.6 per cent this week.

A consensus estimate compiled by Bloomberg is even lower, at 0.4 per cent.

More than US$15 billion (S$20.4 billion) of British corporate debt is trading at distressed prices, according to data compiled by Bloomberg News - up nearly 50 per cent since late September.

One in two companies is likely to face stress in servicing debt by the end of the year, the BOE has warned, which could cause some owners to cut investment and employment sharply.

The reliance on consumer spending also filters into the debt markets.