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The global economic recovery seems to be gathering momentum but for the Bank of England there is a bigger problem, the British consumer. To be accurate, the indebted British consumer.

Today’s release of the Bank of England quarterly inflation report was a mixture of good and bad news. The good being that the British economy is expected to grow for the next two years, with GDP forecast to remain “marginally above trend” at just below 3% by the middle of next year.

The bad being that consumer spending had returned to trend and consumers were borrowing and spending more again. The short blip down in the consumer expenditure trend, which had been observed in August’s inflation report, is now looking more like a pause in the otherwise relentless pursuit of all things consumer and credit.

The combination of soaring house prices and cheap debt, which has fuelled the boom in consumer borrowing and insulated the UK from the worst of the global slowdown, is now in danger of bringing everything to a grinding halt and throwing the British economy into recession.

Just six days ago, the Bank’s Monetary Policy Committee (MPC) raised interest rates by 0.25% points from a 48-year low to 3.75% amid growing concerns over the inability of consumers to moderate their use of credit. A sign that the multi-decade secular bear market in the Base Rate is over.

Growth in secured debt is up 14% over the last year and the level of unsecured borrowing continues to hit new highs. The household debt to income ratio is 130%.

“There is a risk that heavily-indebted households will be badly affected by changes in economic circumstances or interest rates”, said Mervyn King, Governor of the Bank of England at today’s press conference.

Mr . King warned, “Everyone needs to think carefully about the amount of debt they can afford”. A clear indication that everyone with debt should review their situation and decide if they can still afford it as interest rates continue to rise. If not, they should adjust their finances accordingly.

The report noted that households “care about the resources available for immediate consumption, which will be affected by their debt-servicing costs”. Highlighting that indebted households are less concerned with actually paying off the debt than they are with the size of the monthly repayments and how much that leaves them to spend on other things.

Mortgage debt as a percentage of household income has risen from 76% in the first quarter of 1997 to 96% in the second quarter of 2003, during which time house prices have risen by 100% on average.

Figures recently released by both the Nationwide Building Society and the Halifax report house prices are still rising at unsustainable levels, with expectations that house prices will have risen by 15% in 2003.

“The longer house price inflation continues to exceed growth in average household income … the greater the risk of a sharp adjustment in house prices and thus spending further ahead”, the Bank said.

It is not the desire of the Bank that the British consumer stops borrowing altogether, that would be just as bad for the British economy as the continued debtathon. But moderation is needed to ensure that house price inflation can fall to a more realistic and sustainable level, such as single digits. That in turn would help reduce the appetite for credit, which would ultimately negate the need for some of the talked about interest rate rises.

But should the consumer not reign back his use of credit, then prospective interest rate hikes will need to be more severe. The predictable response would be, once an unbearable level is reached, a noticeable decline in spending by nervous consumers and an eventual decline in house prices.

The global recovery is showing overall signs of strengthening. The British economy, because it is not part of Euroland, is in a better shape than continental Europe to benefit from it. The only thing that stands in the country’s way is the record levels of debt. The question is, “Which do you want, economic recovery or bust?”

Water bills could rise by 30% from 2005 as water companies increase spending to meet continued regulatory requirements, with regulator Ofwat more less admitting that the increases are inevitable.

Spending by water companies is expected to rise by £4bn from £17bn in 200-2005 to £21bn in 2005-2010, and those expenses will have to be passed on to the consumer.

These increases do not take into account the costs associated with implementing the Water Framework Directive, costs which have been estimated to be as high as £9bn and likely to result in even heftier increases to householders’ bills.

Such increases can do nothing but exacerbate the number of bad debts, as even greater numbers of consumers find difficulty in paying the ever rising bills.

Bad debts have been rising since the Water Act removed the threat of disconnection from the water industry’s debt collection armoury in 1999. The amount of customer bad debt now stands at nearly £800 million, up 17% since 1999.

As water companies prepare to increase bills to the planned expenditure, the only question is how much more money will they have to divert to spend on trying to deal with the escalation in bad debts.

Provisional figures released today by the Department of Trade and Industry revealed that the number of people going bankrupt surged to its highest level for more than a decade.

Seasonally adjusted figures reveal 9,094 people in England and Wales were declared insolvent between July and September, the biggest number since the first quarter of 1993 and a 16.9% increase on the same quarter last year. A total of 7,086 people were declared bankrupt and further 2,008 established Individual Voluntary Arrangements or Deeds of Arrangement.

The annual number of personal insolvencies has been climbing steadily since it bottomed in 1997 when it fell to just 24,441, for 2003 Debt Advice Bureau™ expectations are for it to exceed the 35,000 level. As for 2004, the bureau believes that it could well pass the 42,000-mark, a level last seen in 1992 when the country was in the depths of recession and mortgage rates spent most of the year above 10%.

What is more disturbing is that these rises have taken place whilst interest rates have been at historic lows and house prices have continued to surge forward.

With Britons borrowing a record £10.7bn in September and yesterday’s quarter point rate rise by the Bank of England expected to do little to stop the debt-a-thon, the British consumer’s inability to sate their desire for credit means that things are going to get a lot worse for an awful lot of people.

The first rise in Base Rates since 10th February 2000 is no more than a warning shot across the bows of the British consumer. Increasing the base rate from 3.50% to 3.75% is a signal that rates can rise and will rise if need be.

Whilst there may be talk of growth and gradually increasing inflationary pressures, the reality is that house prices and consumer spending have continued to grow at levels which the country cannot sustain and which the Bank of England is not happy with.

Inflation may be the Bank of England’s mandate, but it appears as more of an excuse than a reason. With the impending introduction of the Harmonised Index of Consumer Prices, HICP (pronounced hiccup), the new inflation benchmark will be immediately lower and will no longer include house prices or Council Tax. Which may be great for massaging the inflation figures, but doesn’t reflect the reality for anyone who is a homeowner or has to pay the ever-obscene Council tax bill.

Prior to today’s rate announcement there had been some talk of a possible half point increase, with the Forex markets reflecting this, but most commentators were betting on the quarter point rise.

Now the chatter is already focusing on the next increase, as the money markets continue to price in an upward trend in rates. January is being seen as favourite for another 25 basis point rise, which would take the base rate to 4.00% and return it to a level last seen in February 2003.

For the housing market and consumers the message is clear . . . show restraint. That is not to say they want you to stop borrowing and start repaying your debts, far from it. That would be disastrous for the British economy and could lead to a property crash. But the British consumer must curtail their credit mania, or at least make it a little less manic.

Consumer affairs minister Gerry Sutcliffe, MP for Bradford South, has asked lenders to put their hands in their pockets so that more free debt advice can be offered.

Speaking at Thursday’s seminar on consumer credit held by the Finance and Leasing Association, Mr. Sutcliffe, who had been expected to talk about the forthcoming white paper on reforming the 1974 Consumer Credit Act, focussed on the government’s desire to empower consumers.

“To provide an effective advice service, we must have a sustainable funding strategy. More needs to be done”, he said. “I would ask that when each of you is approached with the new funding strategy, you consider the benefits that contributing will undoubtedly bring to you as lenders”.

Whilst it is certain that it can be cost effective for lenders to fund debt advisory services, and when managed properly can drastically reduce debt collection costs.

In a year when the number of people with debt problems have rocketed to record levels, advice centres and bureaux have been forced to close or reduce their service because of a lack of funding from central and local government, there is a sense of irony in the plea being made by Mr. Sutcliffe.