May 2021 – Chris Mallin Macro Perspectives

“Sugar rushes vs. sustained nourishment”

Faster indicators vs. key signals from the UK money sector

The key chart

Change (ppt) in credit and debt card spending versus February 2020 levels (Source: ONS; CMMP)

The key message

Investment narratives, like endurance athletes, require consistent refuelling to sustain their performance particularly as they transition between phases in market cycles. It may take some time before the three key signals for 2021 – a moderation in household savings, a recovery in consumer credit, and a re-synching of money and credit cycles – provide sustained nourishment. In the meantime, so-called “faster indicators” such as estimates for UK spending on credit and debit cards take on greater prominence.

These indicators show a steady increase in spending since the start of the year led by a recovery in spending at stores selling “work-related” and “delayable” goods and services. The latest data release from the ONS (27 May 2020) indicates a loss of momentum in this recovery, however, particularly in the case of delayable goods. With the exception of spending on “staples”, credit and debit card purchases have fallen back/remain below their pre-COVID levels.

The risk with volatile data series (such as faster indicators) is that short term “sugar rushes” are mistaken for more sustainable nourishment. The direction of travel is clearly positive but the recovery in UK consumption remains tentative still. As equity markets transition between their “hope” and “growth” phases, investors who have already paid for expected future growth in cash flows may well pause at this stage and wait for more concrete evidence of sustained growth…

Sugar rushes vs sustained nourishment

**Recovery in spending YTD (ppt) versus February 2020 levels** (Source: ONS; CMMP)

UK spending on debit and credit cards has increased steadily since the start of the year led by a recovery in “work-related” and “delayable” spending. In the week to 20 May 2021, the aggregate CHAPS-based indicator of credit and debit card purchases was at 96% of its pre-COVID, February 2020 average. This represents a 31ppt increase since early January 2021. The largest increases in spending over this period have been seen in “work-related” spending (eg, public transport, petrol) which has risen 45ppt and in “delayable” spending (eg, clothing, furnishings) which has risen 41ppt (see chart above).

**Recent trends in aggregate and delyable spending showing impact of store reopening on 12 April** (Source: ONS; CMMP)

The latest data release from the ONS (27 May 2021) indicates a loss of momentum in this recovery, however, particularly in the case of delayable goods. Aggregate spending peaked at 106% of February 2020 levels in the week to 5 May 2021 and has fallen back to 96% in the week to 20 May 2021. Spending on delayable goods rose sharply in April following the reopening of non-essential retail stores (12 April 2021). In the following week, spending was 22ppt above the February 2020 levels and remained above them until the week to 11 May 2021. Since then, it have fall back to 94% in the week to 20 May 2021.

**Where are we now? Spending versus February 2020 levels** (Source: ONS; CMMP)

With the exception of spending on “staples”, purchases have fallen back/remain below their pre-COVID levels. Other data sources (eg, Barclaycard payments data) indicate an immediate boost in spending in the hospitality sector following the relaxation of lockdown restrictions on 17 May 2021 but these trends are only partially captured here and social spending remained 16ppt below February 2020 levels in the week to 20 May 2021. Aggregate, delayable and work-related spending remain 4ppt, 6ppt and 1ppt below February 2020 levels respectively.

Conclusion

The risk with volatile data series (such as faster indicators) is that short term “sugar rushes” are mistaken for more sustainable trends. The direction of travel is clearly positive but the recovery in UK consumption remains tentative still. As equity markets transition between their “hope” and “growth” phases, investors who have already paid for expected future growth in cash flows may well pause at this stage and wait for more concrete evidence of sustained growth…

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.

“Bashing the plastic”

UK consumers are spending on “delayable” goods again

The key chart

**Credit and debit card payments versus pre-COVID levels by type of spending** (Source: ONS; CMMP)

The key message

In my previous post, “More bullish on UK consumption”, I highlighted potentially good news for UK suppliers of consumer durables. The latest data on UK spending on credit and debit cards provides further support.

At the end of 1Q21, credit and debit card purchases of so-called “delayable” goods were still 31% below the average levels recorded in February 2020 (“pre-COVID”). These purchases recovered strongly in April, however, following the reopening of non-essential retail stores (12 April) and ended the month 6% above pre-COVID levels. Aggregate credit and debit purchases also recovered last month but remain marginally below pre-COVID levels due to the on-going weakness in “social” spending.

A recovery in consumer credit is one of three key signals to watch in the 2021 messages from the money sector. March 2021 data provided only tentative encouragement in terms of the direction of travel, but April’s trends in so-called “faster indicators” may be the start of more substantive support…

Bashing the plastic

In my previous post, “More bullish on UK consumption”, I highlighted potentially good news for UK suppliers of consumer durables. I quantified the level of excess money holdings that UK households have accumulated during the COVID-19 and the potential spending boost in 2H21 and 1H21. I argued that:

“it is reasonable to assume that a large proportion of this will be directed towards durable goods whose consumption was delayed during lockdown.”

The latest data on UK spending on credit and debit cards provides further support. The ONS provides this data based on daily Clearing House Automated Payment System (CHAPS) payments at around 100 major retail companies. Companies are allocated to one of four categories based on their primary business:

“Staples”: companies that sell essential goods such as food and utilities
“Work-related”: companies providing public transport or selling petrol
“Delayable”: companies selling goods whose purchased could be delayed such as clothing or furnishings
“Social”: spending on travel and eating out

**Aggregate and delayable payments up to end-1Q21** (Source: ONS; CMMP)

At the end of 1Q21, credit and debit card purchases of so-called “delayable” goods were still 31% below the average levels recorded in February 2020 (“pre-COVID”). The chart above illustrates the backward looking, seven day rolling average of purchases. Lockdown restrictions had a clear, negative impact on delayable goods purchases in 2Q20 and 1Q21. Aggregate credit and debit card purchases were also 13% below pre-COVID levels at the end of 1Q21, supported only by spending on “staples”.

**What a difference a month makes – payment trends during April 2021** (Source: ONS; CMMP)

These purchases recovered strongly in April, however, following the reopening of non-essential retail stores (12 April) and ended the month 6% above pre-COVID levels (see chart above). Aggregate credit and debit purchases also recovered last month but remain marginally below pre-COVID levels due to the on-going weakness in “social” spending (see chart below).

**Too early yet for a strong recovery in social spending** (Source: ONS; CMMP)

Conclusion

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.

“More bullish on UK consumption”

Good news for suppliers of consumer durables

The key chart

**Estimated growth in excess UK money holdings in £mn** (Source: CMMP)

The key message

UK households (HHs) were already “poised to disappoint” before COVID-19 hit as post-GFC consumption drivers proved unsustainable. During the pandemic, consumption fell much faster than incomes as savings increased markedly. HHs continued to accumulate money holdings at rates well in excess of the pre-COVID period in 1Q21 while YoY declines in consumer credit hit historic levels.

Monthly money flows followed the timing of lockdown restrictions and relaxations closely. This suggests a relatively large element of “forced” savings that could be released relatively quickly to support economic activity. That said, much of these accumulated savings have accrued to HHs that already have sizable savings, have higher incomes, and are older – such HHs typically spend less from any extra savings they accumulate.

Excess money holdings reached £139bn at the end of 1Q21 (CMMP estimates) and could total £164bn by the end of 1H21 (below the OBR’s forecast of £180bn). The latest Bank of England forecast suggests that 10% of these excess money holdings will be spent over the next three years, compared with 5% previously (and current OBR forecasts). This c£16bn spending boost is likely to be front loaded into 2H21 and 1H22.

It is reasonable to assume that a large proportion of this will be directed towards durable goods whose consumption was delayed during lockdown (eg, car sales). So-called “social consumption” will naturally benefit too, but there is only so much time that can be made up – you can only eat so many meals in one day!

Please note that the summary comments above and charts below are extracts from more detailed analysis that is available separately.

The key message in six charts

Post-GFC/Pre-Covid: HH consumption funded initially by slowing rate of savings

**Trends in HH savings and savings ratio since 4Q07** (Source: ONS; CMMP)

During COVID: HH savings increased markedly

**Impact of COVID pandemic on HH savings rate** (Source: ONS; CMMP)

1Q21 – HHs accumulate money holdings at c.4x pre-COVID levels

**Monthly flows of HH money holdings in £bn** (Source: BoE; CMMP)

1Q21 – HH repay consumer credit, YoY growth at historic low

**Impact of COVID pandemic on HH demand for consumer credit** (Source: BoE; CMMP)

Looking forward – excess money holdings estimated to reach £164bn in 1H21

Looking forward – HH to spend more excess savings than previously thought

**BoE’s upgrades to HH consumption consistent with survey results** (Source: BoE/NMG survey; CMMP)

“Cyclical vs Digital”

Challenges and opportunities for UK mortgage providers

The key chart

**Trends in YoY growth rates in UK mortgages, consumer credit and corporate credit** (Source: BoE; CMMP)

The key message

The relative stability in UK mortgage demand has been a consistent theme in the “message from the UK money sector” over the past five years. During the COVID-19 pandemic, this stability was the only bright spot in an otherwise gloomy UK retail finance market:

Monthly net borrowing hit £11.8b in March 2021, the strongest net borrowing since records began in 1993, driven by the expected ending of temporary stamp duty tax relief
Looking forward, approvals are below their November 2020 peak but remain relatively strong
Margin pressures are easing as the effective rate on new mortgages continues to rise, but remain a challenge for mortgage providers.

Against this cyclical backdrop, digital transformation remains the primary challenge and opportunity for the sector as providers seek to meet their customers’ needs more effectively while delivering operational efficiencies.

Experience across Europe shows how digitalisation can deliver tangible benefits including reduced costs, automated scoring/applications, enhanced market segmentation, and improved treasury and liquidity management.

Challenges and opportunities

The relative stability in UK mortgage demand has been a consistent theme in the “message from the UK money sector”. Over the past five years, the annual (nominal) growth in mortgages has averaged 3.3%. The lowest rate of growth (2.7%) was recorded in August 2020 and October 2020 and the maximum rate of growth (3.8%) in March 2021. The relative stability in mortgage demand contrasts sharply with the more volatile corporate (NFC) and consumer credit demand, especially during the COVID-19 pandemic (see key chart above).

**Twenty-year trends in UK mortgage demand** (Source: BoE; CMMP)

That said, current mortgage demand remains subdued in relation to historic trends. For reference, the average nominal and real rates of growth in the five years between March 2003 and March 2008 were 12.2% and 10.1% respectively, compared with 3.3% and 1.5% averages in the past five years (see chart above).

**Monthly flows (£bn) in UK lending to individuals since January 2020** (Source: BoE; CMMP)

During the COVID-19 pandemic, this stability was the only bright spot in an otherwise gloomy UK retail finance market. The chart above illustrates monthly mortgage flows in blue, other consumer credit in maroon and credit cards in green. The weakest net borrowing occurred at the height of the pandemic in April 2020, but mortgage borrowing remained positive. In contrast, UK households have been repaying consumer credit in each of the past seven months.

The latest data for March 2021, for example, shows lending to individuals totalling £11.3bn. This includes £11.8bn mortgage borrowing and net repayments of both credit cards and other consumer credit of £-0.4bn and £-0.2bn respectively.

**A new high in monthly net borrowing of £11.8bn** (Source: BoE; CMMP)

Monthly net borrowing hit £11.8b in March 2021, the strongest net borrowing since records began in 1993. Net borrowing had averaged £6bn over the previous six months, with a gradually rising trend. The large jump in March reflects expectations that temporary stamp duty tax relief would be ended in March. This has now been extended to the end of June 2021. The previous peak in monthly net borrowing (£10.4bn) occurred in October 2006.

**Trends in approvals for house purchase** (Source: BoE; CMMP)

Approvals are below their November 2020 peak but remain relatively strong. The number of approvals for house purchases has fallen from 103,100 in November last year to 82,700 in March 2021. The latest approvals are 45% and 32% above the 56,945 and 62,663 approvals in March 2020 and March 2019 respectively.

**Effective rates on new mortages and on the outstanding stock** (Source: BoE; CMMP)

Margin pressures are easing as the effective rate on new mortgages continues to rise, but remain a challenge for mortgage providers. The effective rate of interest paid on the outstanding stock of mortgages has been stable during 1Q21 but at a new low of 2.08bp, down 4bp YTD. The effective rate on new mortgages has risen to 1.95% from the series low of 1.72% in August 2020. So while margin pressures remain, the spread between the effective rates has narrowed to 13bp.

What now for UK mortgage providers?

Against this cyclical backdrop, digital transformation remains the primary challenge for the sector as providers seek to meet their customers’ needs more effectively while delivering operational efficiencies.

Experience across Europe shows how digitilisation is already delivering tangible results across operations, sales and risk. Examples include: the automation of credit applications to deliver 70% FTE reductions; improved risk scoring for first time borrowers; micro-segmentation to support more targeted sales; and optimised treasury and liquidity management.

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.

“Making sense…”

Interpreting 1Q21 monetary trends in the UK and EA

The key chart

**Trends in YoY growth rates for UK and EA broad money** (Souce: BoE; ECB; CMMP)

The key message

Trends in monetary aggregates provide important insights into the interaction between the money sector and the wider economy. Headline growth figures can easily be misinterpreted, however, leading to false narratives regarding their implications for investment decisions and asset allocation.

To avoid this, CMPP analysis has identified three key signals that help to interpret current trends in the UK and euro area (EA) effectively: monthly household (HH) deposit flows (behaviour); the synchronisation of money and credit cycles (policy context); and consumer credit (growth outlook).

The UK and EA money sectors have provided consistent, if subdued, messages regarding HH behaviour, the policy context and the consumption/growth outlook during 1Q21:

HHs in the UK and EA continue to increase their money holdings at very elevated rates, despite earning negative returns. Such behaviour contributes to neither growth nor inflation – a challenge for inflation hawks
The unprecedented desynchronization of money and credit cycles continues to limit monetary policy effectiveness
HHs are still repaying consumer credit and YoY growth rates hit historic lows during 1Q21

The key messages from the money sectors (summarised above) have provided only limited nourishment for those positioned for sustained inflation and/or cyclical recovery in the UK and EA to date.

March data provided tentative encouragement in terms of the direction of travel but more substantive support may be required in 2Q21 to sustain recent performance.

Rather than focusing on headline growth numbers in broad money, investors should look instead for a more noticeable moderation in HH deposit flows, a resynchronisation in money and credit cycles and a recovery in consumer credit over the coming months.

Making sense of monetary aggregates

The CMMP approach

Trends in monetary aggregates provide important insights into the interaction between the money sector (central banks, FIs and NBFIs) and the wider economy. Headline YoY growth figures can easily be misinterpreted, however, leading to false narratives regarding their implications for investment decisions and asset allocation.

To avoid this, CMPP analysis has identified three key signals that help to interpret current trends in the UK and EA effectively: monthly HH deposit flows (behaviour); the synchronisation of money and credit cycles (policy context); and consumer credit (growth outlook).

A review of 1Q21

The UK and EA money sectors have provided consistent, if subdued, messages regarding household (HH) behaviour, policy effectiveness and the consumption/growth outlook during 1Q21.

**Monthly HH deposit flows as a multiple of 2019 average monthly flows** (Source: BoE; ECB; CMMP)

HHs in the UK and EA continue to increase their money holdings at elevated rates, despite earning negative returns. UK and EA monthly flows of HH deposits are still 3.5x and 1.9x the levels seen in the pre-COVID periods. These latest data points for March 2021 are below the respective peaks of 5.8x (May 2020) and 2.4x (March 2020) for the UK and EA respectively. Nonetheless, they show that HHs are still preferring to hold highly liquid assets (overnight deposits), despite earning negative real returns.

High levels of precautionary and forced savings indicate that HH uncertainty remains elevated and consumption delayed (see below). The challenge here for inflation hawks is that money sitting idly in overnight deposits contributes to neither GDP growth nor inflation.

**Gap between lending growth and money growth in the UK and EA** (Source: BoE; ECB; CMMP)

The unprecedented desynchronization of money and credit cycles continues to limit monetary policy effectiveness. The gap between YoY growth rates in private sector lending and money supply hit historic highs of 11.4ppt in the UK in February and 8.0ppt in the EA in January. This matters because the effectiveness of monetary policy relies, in part, on certain stable relationships between monetary aggregates.

The latest data for March 2021, indicates that the gaps have narrowed slightly to 10.8ppt in the UK and 6.5ppt in the EA. Again, inflation hawks will be disappointed, however, by the slowdown in the growth rates in private sector credit. In the UK, this fell from 3.9% YoY in February to only 1.5% YoY in March and in the EA, from 4.5% YoY in February to 3.6% in March.

**Monthly flows in UK and EA consumer credit** (Source: BoE; ECB; CMMP)

HHs are still repaying consumer credit and YoY growth rates hit historic lows during 1Q21. In the UK, HHs have repaid consumer credit for seven consecutive months. In the EA, they have repaid consumer credit in five of the past seven months.

**YoY growth rates in UK and EA consumer credit** (Source: BoE; ECB; CMMP)

In both regions, the YoY growth rate hit a historic low in February of -10.0% in the UK and -2.8% in the EA before. In March the rate of decline slowed to -8.6% and -1.7% in the UK and EA respectively.

Investment implications

Investment narratives, like endurance athletes, require consistent refuelling to maintain performance. The best returns from equities are typically when economies are still weak but the rate of growth is either inflecting upwards or looking less weak. If such trends are accompanied by rising bond yields then cyclical sectors/stocks will typically outperform defensive sector/stocks (Oppenheimer, 2020). The key messages from the money sectors (summarised above) have provided only limited nourishment for those positioned for sustained inflation and/or cyclical recovery in the UK and EA in 2021 to date.

What to watch for in 2Q21

March data provided tentative encouragement in terms of the direction of travel but more substantive support may be required in 2Q21 to sustain recent performance. Rather than focusing on headline growth numbers in broad money, investors should look instead for a more noticeable moderation in HH deposit flows, a resynchronisation in money and credit cycles and a recovery in consumer credit over the coming months.

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.