The latest report on consumer credit by independent research company Verum Financial Research says over-indebtedness among the ‘squeezed middle’ poses a serious threat to the UK’s economic recovery.

35-44 year olds with children are finding it particularly difficult to maintain living standards due to an unhealthy combination of high debts and falling real incomes.

Since 1990, the total amount of credit owed by UK households has more than quadrupled from £347bn to £1,437bn. An inability to pay off accumulated debt has been compounded by the increasing cost of living. As a result, even a small increase in interest rates will put already tight family finances under severe strain.

Professor James Fitchett, of Leicester University School of Management, says in a foreword to Verum’s report: “The main problem facing the UK economy is therefore now a problem concerning consumer spending and debt. As these data show in considerable detail, the prospect of even slightly higher marginal lending rates could have a catastrophic effect on the economy.”

The true extent of the problem is disguised by the fact that total aggregate household assets exceed total household liabilities. However, Verum has identified an important age category mismatch: high asset wealth is concentrated among 55-64 year olds while high debt is most prevalent among 35-44 year olds.

Robert Macnab, Verum’s director of research, said: “The level of debt among adults aged 35-44 with children is constraining this key group’s ability to support economic growth. Many are further burdened by having to financially support unemployed or under-employed older children still living at home.

“In the past this age group has driven economic growth through a willingness to use mortgages, credit cards and unsecured loans to finance spending. Today, excessively high debt levels and falling real terms incomes are preventing the squeezed middle from performing this vital economic function.

“To maintain the recovery and keep a lid on inflation while taking account of the family debt time bomb is an incredibly tough balancing act. Verum’s research has shown that because outstanding debt levels are so high, particularly mortgage debt, even relatively small increases in interest rates will have a significant impact on household spending.

“We have identified an important threshold when 12% of household disposable income goes to servicing debt interest payments. The reaction of families when this threshold is reached is to cut back on credit-sensitive purchases such as vehicles, holidays, durable goods and furniture, which inevitably results in recession.

“Last year there were three times as many consumer insolvencies as during the last interest-rate recession of 1990/91, and this with a record low interest rate of 0.5% since 2009, compared to 14.6% in the early ’90s.

“With so many families so frighteningly close to tipping point, our model suggests that every 0.5% increase in base rate will cut £4.8bn from UK household spending. If interest rates were to hit 3%, historically an abnormally low level, it could trigger a prolonged and socially damaging recession with collapsing house prices, rising property repossessions and a further dramatic increase in insolvencies.”