“Extremes may have peaked, but…” (Source: ECB; CMMP analysis)
The key message
Broad money (M3) growth in the euro area slowed from 10.1% YoY in July to 9.5% YoY in August, but remains elevated in relation to recent trends. Narrow money (M1) growth also slowed from 13.5% YoY in July to 13.2% in August, but still contributed 9ppt to the overall growth in broad money.
Monthly flow data supports the narrative that uncertainty levels have peaked but remain elevated. Household and corporate monthly deposit flows, for example, peaked in April and May, but still remain 1.4x and 2.1x their respective 2019 averages.
Growth in private sector credit, the main counterpart to M3, has also slowed from May’s recent high of 5.3% YoY to 4.6% YoY in August but the gap between growth in the supply of money and the demand for credit remains very wide. Private sector deleveraging in the euro area remains gradual and incomplete.
As before, relatively robust corporate demand for credit (7.1% YoY) and resilient mortgage demand (4.1% YoY) offset relatively weak demand for consumer credit (0.3% YoY). However, more extreme monthly variations in credit demand have moderated.
On a positive note, consumers in the euro area stopped repaying credit in May and monthly consumer credit flows over the past three months have been close to the average levels of 2019.
In short, no change to the message from the money sector in August – extreme monthly flows may have peaked, but the road to recovery in the euro area remains long and uncertain.
Six charts that matter
Money supply growth slowed slightly in August but remains elevated (Source: ECB; CMMP analysis)HH monthly deposit flows remain 1.4x their 2019 average (Source: ECB; CMMP analysis)NFC monthly deposit flows also 2x their 2019 average (Source: ECB; CMMP analysis)One of my favourite charts and a clear indicator of on-going balance sheet adjustments (Source: ECB; CMMP analysis)PSC growth drivers remain unchanged (Source: ECB; CMMP analysis)Finally, on a positive note – monthly consumer credit flows have bounced back to their 2019 levels (Source: ECB; CMMP analysis)
Please note that the summary comments and graphs above are extracts from more detailed analysis that is available separately.
How does the ECB view the increase in household savings and why does it matter?
The key chart
To what extent is the increase in HH savings in response to COVID-19 “forced” or “precautionary” and why does it matter? (Source: ECB; Eurostat; CMMP analysis)
The key message
The overriding message from the European and UK money sectors remains one of heightened uncertainty and deficient credit demand. Narrow money (M1) is playing an ever-increasing role in broad money (M3) growth despite negative real returns on overnights deposit as the household propensity to save reaches unprecedented levels in response to COVID-19.
A recent chart repeated – M1 is playing an ever-increasing role in broad money growth in the EA and in the UK (Source: ECB; Bank of England; CMMP analysis)
The key unknown here is the extent to which the increase in savings is “forced” or “precautionary”. This matters because forced savings can be released relatively quickly to support economic activity while precautionary savings are unlikely to move straight into investment or consumption.
In the latest Economic Bulletin, ECB economists estimate the contribution of both factors to the increase in savings during 2020. They conclude that the rise in expected unemployment has led to a significant contribution of precautionary savings but that this alone cannot explain the increase. In contrast, they argue that, “forced savings seem to be the main driver of the recent spike in household savings” (see graph below).
ECB estimates of the drivers in the HH savings rate during 2020 (Source: ECB Economic Bulletin)
Despite this, they point to considerable uncertainty regarding pent-up demand in the short term. Recent CMMP analysis has highlighted a v-shaped recovery in EA consumer credit with monthly flows recovering to just below their 2019 monthly average.
Another repeated chart from earlier this month – monthly consumer credit flows in the EA in EUR billions (Source: ECB; CMMP analysis)
Counterbalancing these ST trends, the EC consumer survey covering the period to August 2020 suggests that in the next twelve months HHs expect to spend less on major purchases than at the beginning of 2020, despite the amount of savings they have accumulated.
It is hard to argue against the ECB’s conclusion that, “over the next year, precautionary motives may still keep households’ propensity to save at levels that are higher than before the COVID-19 crisis.”
Inflation hawks will need to be patient!
Please note that the summary comments above are extracts from more detailed analysis that is available separately.
Time for new terms of reference when analysing global debt levels (Source: BIS; CMMP analysis)
The key message
Last week’s data release from the BIS provides five important insights into the “macro-state-of play” at the end of 1Q20 – the point at which the Covid-19 pandemic intensified globally:
Insight #1: the pandemic coincided with a new peak in global debt ($192tr), with the global debt ratio coming within 0.2ppt of its previous 3Q16 and 1Q18 peaks. Up to this point, the split between private ($122tr) and public ($69tr) was broadly unchanged at 64% and 36% respectively (n.b. I have deal with the subsequent impact of global policy responses on public sector debt levels in previous posts).
Insight #2: the long-term trend of passive deleveraging by the private sector in advanced economies continues with direct implications for: the duration and amplitude of money, credit and business cycles; inflation; policy options; and the level of global interest rates.
Insight #3: China’s catch-up story has replaced the wider emerging market (EM) catch up story. EM debt accounts for 36% of global debt but with China accounting for 68% of EM debt now compared with only 30% twenty years ago – strip out China and EM debt is now a slightly smaller share of global debt than it was five years ago.
Insight #4: the traditional distinction between emerging and developed/advanced economies is less relevant and/or helpful, especially when analysing Asia debt dynamics.
Insight #5: it is more helpful to begin by distinguishing between economies with excess household and/or corporate debt and the RoW and then consider the rate of growth and affordability of debt in that context. More to follow on both…
In the meantime, the key message is the importance of distinguishing between the “event-driven” effects of the Covid pandemic and longer-term “structural-effects” associated with the level, growth and affordability of different types of debt.
Five key charts
Insight #1: The pandemic coincided with a new peak in global debt (Source: BIS; CMMP analysis)Insight #2: the LT trend of passive deleveraging by the private sector in advanced economies continues (Source: BIS; CMMP analysis)Insight #3: China increasingly dominates the “EM catch-up” story (Source: BIS; CMMP analysis)Insight #4: traditional distinctions between EM and advanced economies are less relevant, especially when analysing Asian debt dynamics (Source: BIS; CMMP analysis)Insight #5: the key chart repeated – new terms of reference are needed as the starting point for analysing global debt (Source: BIS; CMMP analysis)
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
How do the messages from the money sectors compare?
The key chart
Broad money growth is accelerating in both regions, but how do the messages behind these trends compare and what do they mean? (Source: ECB; Bank of England; CMMP analysis)
The key message
Broad money growth is accelerating in both the euro area (EA) and the UK but how do the messages behind these trends compare and what do they mean for investors?
M1 dynamics are the key growth drivers here as EA and UK households and corporates maintain high preferences for holding liquid assets despite negative real returns. Above trend corporate credit and resilient mortgage demand is offsetting weakness in consumer credit in both regions but with more volatile YoY credit dynamics in the UK. The growth gap between the supply of money and the demand for credit has reached new 10-year highs.
The overriding message here is one of uncertainty and deficient credit demand, a more nuanced message than some inflation hawks suggest.
Looking at ST dynamics, uncertainty peaked in May in both regions, HHs have stopped repaying consumer credit and the NFC “dash-for-cash” has also peaked.
From an investment perspective, 2020 is seen best as a year when an extreme event (Covid-19) engulfed weak, pre-existing cyclical trends. The negative impacts of this event have peaked, at least from a monetary perspective. However, adverse (over-arching) LT structural dynamics that have their roots in excess levels of private sector debt remain with negative implications for money, credit and business cycles and future investment returns.
The charts that matter
The key chart above illustrates how growth in broad money (M3) is accelerating in both the EA and UK. In the EA, M3 grew 10.2% in nominal and 9.8% terms YoY in July, the highest rates of growth since May 2008 and July 2007 respectively. In the UK, M3 grew 11.9% in nominal and 10.8% in real terms in July, the highest rates of growth since April 2008 and June 2008 respectively (n.b. I am using M3 here for comparison purposes rather than the Bank of England’s preferred M4ex measure referred to in other posts). These trends have helped to ignite the “inflation versus deflation” debate which, in turn, requires investigation of trends in the components and counterparts of broad money growth.
M1 is playing an increasing role in M3 in the EA and the UK despite negative real returns from overnight deposits (Source: ECB; Bank of England; CMMP analysis)
From a components perspective, narrow money (M1) is playing an increasing role in this growth despite negative real returns as EA and UK households (HHs) and corporates (NFCs) maintain high preferences for liquid assets. In the EA, M1 now accounts for 70% of M3 compared with only 42% twenty years ago. In the UK, M1 now accounts for 65% of M3 versus only 48% twenty years ago (see chart above). In both cases, the share of narrow money in broad money is at a historic high – potentially negative news for inflation hawks as HH and NFCs continue to save in the face of high uncertainty levels. The key unknown here is the extent to which these savings are forced or precautionary. Forced savings can be released relatively quickly to support economic activity. In contrast, precautionary savings are unlikely to move straight into investment or consumption.
Similar NFC, mortgage and consumer credit trends but with more volatile YoY growth dynamics in the UK (Source: ECB; Bank of England; CMMP analysis)
From a counterparts perspective, above trend NFC credit and resilient HH mortgage demand is offsetting weakness in consumer credit, with the UK demonstrating more volatile YoY growth dynamics than the EA. The graph above illustrates YoY growth trends in NFC credit (green), mortgages (blue) and consumer credit (red) for the EA (dotted lines) and the UK (full lines) over the past 5 years.
NFC credit is growing well above trend in both regions, but below May’s recent peak levels. In the EA, NFC credit grew 7.0% in July versus 7.3% in May. In the UK, NFC credit grew 9.6% in July versus 11.2% in May. Mortgage demand has remained resilient in both regions growing 4.2% in the EA and 2.9% in the UK. Weakness in consumer credit appears to be stabilising (see monthly trends below). In the EA consumer credit grew 0.2% in July unchanged from June, but still a new low YoY growth rate. In the UK, consumer credit declined -3.6% YoY compared with a decline of -3.7% in June.
Counterparts versus components – new peak gaps in the growth of private sector credit and money supply (Source: ECB; Bank of England; CMMP analysis)
Diverging trends between the components and counterparts of broad money tell an important story – the gap between the growth in money supply and the growth in credit demand is at new 10-year peak levels. In the EA, the gap between M3 growth (10.2%) and adjusted loans to the PSC growth (4.7%) was 5.5ppt (or minus 5.5ppt in the graph above). This is a 10-year peak and the largest gap since 2001 (not shown above). In the UK, the gap between M4ex growth (12.4%) and M4Lex (5.5%) was 6.9ppt, again a new 10-year peak. In “normal cycles”, money supply and the demand for credit would move together but current trends are indicative of a basic deficiency in credit demand and a second potentially negative piece of news for inflation hawks.
Uncertainty proxies for EA HHs and NFCs (Source: ECB; CMMP analysis)
Looking at ST dynamics, “uncertainty” appears to have peaked at the same time (May 2020) in both the EA and the UK but remains very elevated against historic trends. In this context, trends in monthly flows into liquid assets offering negative real returns are used a proxy measure for uncertainty. In July, deposits placed by EA HHs totalled €53bn, below April 2020’s peak of €80bn but still above the 2019 average monthly flow of €33bn. NFC deposits increased by €59bn in July. Again this was below May 2020’s peak flows of €112bn but still well above the 2019 average monthly flow of €13bn (see chart above).
Uncertainty proxies for UK HHs and NFCs (Source: Bank of England; CMMP analysis)
In the UK, HH deposit flows totalled £7bn in July, down from the May 2020 peak of £27bn but above the 2019 monthly average flow of £5bn. NFCs deposits in July rose from £8bn in June to £ 12bn in July. These were also below the May 2020 peak of £26bn but well above the £0.8bn 2019 average (see chart above).
Monthly consumer credit flows in the EA (Source: ECB; CMMP analysis)
HHs have stopped repaying consumer credit and monthly flows have bounced back to just below (EA) or just above (UK) 2019 monthly average. In July, EA consumer credit totalled €3.2bn and €3bn in June and July respectively. This followed repayments of €-12bn, €-14bn and €-2bn in March, April and May respectively. The last two months’ positive monthly flows compare with the 2019 average of €3.4bn.
Monthly consumer credit flows in the UK (Source: Bank of England; CMMP analysis)
After four consecutive months of net repayments, UK consumer credit turned positive in July. The £1.2bn borrowed in July was above the average £1.2bn recorded in 2019. As noted above, the recent weakness in consumer credit means that the average growth rate (-3.6% YoY) is still the weakest since the series began in 1994.
Conclusion
In “August snippets – Part 1”, I highlighted the importance of disciplined investment frameworks and followed this in “August snippets – Part 2” by revisiting the foundations of my CMMP Analysis framework that incorporates three different time perspectives into a single investment thesis. How do July’s trends fit into this framework?
The overriding message here is one of uncertainty and deficient credit demand, a more nuanced message than some inflation hawks suggest. Looking at ST dynamics, uncertainty peaked in May in both regions, HHs have stopped repaying consumer credit and the NFC “dash-for-cash” has also peaked. From an investment perspective, 2020 is seen best as a year when an extreme event (Covid-19) engulfed weak, pre-existing cyclical trends. The negative impacts of this event have peaked, at least from a monetary perspective. However, the negative (over-arching) LT structural dynamics that have their roots in excess levels of private sector debt remain with negative implications for money, credit and business cycles and future investment returns.
If you go down to the woods today…
Please note that summary comments and graphs above are extracts from more detailed analysis that is available separately
