KPMG UK Analyzes Latest Credit Data, Warns the Economy Is Showing Signs of Stress

Why It Matters

The emerging credit stress signals weakening household resilience, which could boost loan losses for banks and dampen broader economic growth.

Key Takeaways

• Consumer defaults rising, indicating weakening household resilience
• Home‑purchase loan demand flat amid high borrowing costs
• Remortgaging activity climbs as borrowers chase better rates
• Unsecured credit usage steadies, reflecting reliance on short‑term financing
• Lenders face pressure to support customers while limiting risk exposure

Pulse Analysis

The Bank of England’s quarterly Credit Conditions Survey has long served as a barometer for the health of Britain’s financial system. KPMG’s latest interpretation of the Q1 2026 data highlights a nuanced picture: while overall loan demand shows pockets of stability, underlying metrics such as default rates and borrowing patterns point to growing fragility. Geopolitical tensions that have kept fuel prices volatile, combined with persistently high inflation and mortgage rates, are eroding disposable income and amplifying the pressure on household budgets.

Household behavior is adapting in ways that could prove unsustainable. Flat demand for new home‑purchase mortgages reflects affordability constraints, yet a noticeable uptick in remortgaging indicates borrowers are scrambling to lock in lower rates before existing deals expire. Simultaneously, the steadiness of unsecured credit usage—credit cards and personal loans—suggests families are leaning on short‑term financing to cover routine expenses. This reliance on revolving credit, coupled with an uptick in consumer defaults, signals that many households lack sufficient cash flow buffers and may be depleting savings to stay afloat.

For lenders, the emerging landscape demands a calibrated response. While regulatory expectations still emphasize responsible lending, banks must also navigate the competitive imperative to retain customers during a tightening cycle. Strengthening credit‑risk monitoring, adjusting pricing to reflect heightened default risk, and offering flexible repayment solutions can mitigate potential losses. At the macro level, sustained credit stress could feed into slower consumption growth, reinforcing the need for policymakers to address the underlying cost‑of‑living pressures that are driving these borrowing trends.