Aggregate weekly card payments in 2021 versus pre-COVID levels (Source: ONS; CMMP)
The key message
Are UK consumers merely forming orderly queues or is the recovery in consumption stalling already?
Aggregate card purchases have fallen back from the recent peak of 106% pre-COVID spending (5 May 2021) to 90% pre-Covid spending according to the latest ONS “experimental faster indicators“.
Spending across all categories is higher than at the start of the year although aggregate, delayable and social spending all remain below pre-Covid levels. With the exception of staples, all consumption categories have seen an increase in spending since the period before restrictions on the opening of non-essential stores were eased on 12 April. The largest increases over this period have been in work-related (25ppt) and delayable spending (22pt).
Spending on delayable goods (eg, clothing, furniture) is a useful indicator regarding the extent to which the £160bn in excess savings built up during the pandemic is returning to the economy via consumption. These purchases recovered strongly to reach a YTD high of 122% pre-COVID spending on 19 April. Momentum has slowed since then, however, with the latest data indicating delayable spending at only 84% of pre-COVID levels.
As before, the ONS’ real time indicators continue to a point to a steady recovery in UK credit and debit card purchases. At the same time, they are likely to disappoint those hoping for a more rapid recovery in consumption. As equity markets have transitioned from their “hope” to “growth” phases, much of the expected future growth in cash flows has been paid for already. A next leg may require more concrete evidence of sustained growth in consumption.
Forming an orderly queue…?
Aggregate card purchases in the UK have fallen back from their 5 May 2021 peak of 106% pre-COVID spending to 90% in the week to 17 June 2021 (see key chart above). All spending categories with the exception of “work-related” spending decreased over the latest weekly period. The data series shown here is part of the ONS’ “experimental faster indicators” for estimating UK spending on credit and debit cards, which track daily CHAPS payments by credit and debt card payment processors to around 100 major UK retail outlets.
Card payments versus pre-COVID levels by type of spending (Source: ONS; CMMP)
Spending across all categories (delayable, social, staple, and work-related) is higher than at the start of the year. The largest increases in spending have been in work-related (57ppt), social (34ppt) and delayable (30ppt) goods. Aggregate, delayable and social spending all remain below pre-COVID levels, however (see chart above).
Card spending by type since relaxation of restrictions on store openings (Source: ONS; CMM)
With the exception of staples, all consumption categories have seen an increase in spending since the period before restrictions on the opening of non-essential stores were eased on 12 April (see chart above). The largest increases over this period have been in work-related (25ppt) and delayable spending (22pt).
Recent trends in aggregate card spending and spending on delayable goods (Source: ONS; CMMP)
Conclusion
As before, the ONS’ real time indicators continue to a point to a steady recovery in UK credit and debit card purchases. At the same time, they are likely to disappoint those hoping for a more rapid recovery in UK consumption.
In May, I suggested that, “As equity markets transition between their “hope” and “growth” phases, investors who have already paid for expected future growth may well pause at this stage and wait for more concrete evidence of a sustained recovery”. The UK narrative remains the same.
Spanish MFIs’ record of negative contribution to EA mortgages
The key chart
EA mortgage growth (% YoY) and contribution from Spanish MFIs (ppt) (Source: ECB; CMMP)
The key message
Spanish MFIs have a more consistent record than Rafael Nada at Roland-Garros.
While Rafa has won eight of the last ten French Open men’s singles championships (2011-2020) and a record 13 titles in total, Spanish MFIs have delivered an unbroken decade of negative contributions to euro area mortgage growth.
120 consecutive months of negative contribution since April 2011.
While the YoY growth rate and contribution were both marginally negative in April 2021, the last three months have seen positive monthly flows. Are Spanish MFIs about to rejoin the EA mortgage party in 2021?
The latest bank lending survey suggests a neutral/slightly negative supply-side outlook but, in combination, four factors suggest a more positive demand-side outlook:
The HH debt ratio has fallen back in line with the EA average (63% GDP) following a decade of deleveraging
The cost of borrowing is at a record low (1.49% in April 2021)
From (1) and (2), the HH debt service ratio has fallen to 6.5%, below its LT average of 7.9% and close to a 20 year low
House prices remain 28% below their peak in real terms and estimated valuations are less extreme than elsewhere in the EA
None of these four factors are new in themselves and future developments remain “highly dependent on the recovery path and the ability of Spanish and EA policymakers to prevent cliff edges by not abruptly ending support measures” (ECB, 2021). Nonetheless, Spain remains the EA’s third largest mortgage market and mortgage debt represents c80% of total HH debt. A continued rebound in monthly mortgage flows and sustained positive contributions to EA mortgage growth would represent an important signal for investors positioned for a recovery in Europe.
More consistent than Rafa!
Spanish MFIs have a more consistent record than Rafael Nada at Roland-Garros. While Rafa has won eight of the last ten French Open men’s singles championships (2011-2020) and a record 13 titles in total, Spanish MFIs have delivered an unbroken decade of negative contributions to euro area mortgage growth – 120 consecutive months of negative contribution since April 2011 (see key chart above).
Outstanding stock of mortgages provided by Spanish MFIs and market share of EA (Source: ECB; CMMP)
The outstanding stock of mortgages has fallen 23% from €663bn in April 2011 to €508bn in April 2018 (slightly above January 2021’s recent low of €506bn). Over the same period, the outstanding stock of EA mortgages has risen 27% from €3,767bn to €4,798bn. The market share of Spanish MFIs has fallen from 18% to 11% due to these divergent growth trends (see chart above).
Stable “collective” market shares masks significant differences between the big 4 (Source: ECB; CMMP)
As an aside, the market share of German, French, Spanish and Dutch MFIs has remained remarkably stable over this period at 75%. This aggregate share trends masks very different trends at the country level, however. The market shares of German and French MFIs have risen from 26% to 30% and from 21% to 25% respectively, while the market share of Dutch MFIs has remained constant at 11%.
YoY growth in Spanish MFI mortgages (Source: ECB; CMMP)Monthly mortgage flows – three consecutive positive months (Source: ECB; CMMP)
While the YoY growth rate and contribution were both marginally negative in April 2021, the last three months have seen positive monthly flows (see charts above). Does this meant that Spanish MFIs are about to rejoin the EA mortgage party? The latest bank lending survey suggests a neutral supply-side outlook, but four factors suggest a more positive demand-side outlook: HH debt ratios; the cost of borrowing; HH debt service ratios; and house prices and valuation.
HH debt ratios
HH debt ratios (% GDP) for EA and Spain since December 2000 (Source: BIS; CMMP)
The HH debt ratio has fallen from 86% GDP (2Q10) to 63% GDP, in line with the EA average. To mix sporting metaphors horribly, the past two decades has been a “game of two halves”.
Twenty years ago, the HH debt ratios for the EA and Spain were similar at 49% GDP and 46% GDP respectively. At their respective peaks in 2Q10, these ratios had risen to 64% GDP and 86% GDP. (Note that the BIS considers 85% GDP to be the threshold level above which HH debt becomes a constraint on future growth.). By 4Q19, the EA and Spanish debt ratios had fallen back to 58% GDP and 57% GDP respectively and ended 2020 at the same level of 63% GDP. (Note also that the increase in the debt ratio in 2020 was driven by GDP falling more than the fall in debt levels.)
Sustained HH deleveraging was a key explanatory factor behind negative growth and contributions from Spanish MFIs in the past.
Cost of borrowing
Cost of borrowing at a record low (Source: ECB; CMMP)
The cost of borrowing has fallen to a new low of 1.49% (April 2021). The cost of borrowing has fallen 23bp YoY and recent press articles suggest increased price competition in May and June particularly from those MFIs that lost market share during the lockdown.
Fixed versus floating (Source: ECB; CMMP)
Price competition is particularly strong in the fixed mortgage market. Spain has historically had a bias towards more floating rate lending than other EA economies (see chart above). However, in April 2021, the share of mortgages with a floating rate or an initial fixation of up to one year fell to 28%, slightly above the record low of 27% in March. For reference, the share of floating rate mortgage loans in the EA also hit a new low in April at 15% to total mortgage loans.
HH debt service ratios (affordability)
Affordability risk close to twenty year low (Source: BIS; CMMP)
The HH debt service ratio (DSR) in Spain is currently 6.5% (as at end 4Q20). This compares with a peak level of 11.7% in 3Q08 and a LT average of 7.9%. With lower debt ratios and record low costs of borrowing, it is unsurprising that affordability is not a significant demand constraint for Spanish HHs, currently.
House prices and (over)valuation
Real YoY growth in house prices over past 20 years (Source: BIS; CMMP)Real house price index trends 2010 = 100 (Source: BIS; CMMP)
House prices are 28% below their peak in real terms and valuations less extreme than elsewhere in the EA.
Spanish house prices peaked in 3Q07. They did not recover in real terms until 2Q14, almost seven years later. Despite the recovery since then, prices remain 28% below their peak level in real terms.
Overvaluation estimates as at end 2020 (Source: ECB; CMMP)
In “Herd immunity”, I noted the resilience and risks in global housing since the COVID-19 pandemic hit, especially in advanced economies, and the fact that some of the largest increases in EA house prices during 2020 had occurred in economies where house prices were also among the most overvalued (Luxembourg, Denmark, Austria). According to ECB estimates, house prices in Spain are overvalued by around 5%, a more modest level than elsewhere in the region.
Conclusion
None of the four factors highlighted above are new in themselves and future developments remain “highly dependent on the recovery path and the ability of Spanish and EA policymakers to prevent cliff edges by not abruptly ending support measures” (ECB, 2021). Nonetheless, Spain remains the EA’s third largest mortgage market and mortgage debt represents c80% of total HH debt. A recovery in mortgage demand and sustained positive contributions to EA mortgage growth would represent an important signal of a recovery in the EA.
“Vamos, Rafa” – good luck in Friday’s semi-final against Novak!
Please note that the summary comments and charts above are summaries from more detailed analysis that is available separately
UK spending recovery is steady rather than dramatic
The key chart
Aggregate credit and debit card purchases versus February 2020 (pre-COVID) average (Source: ONS; CMMP)
The key message
ONS real-time indicators continue to point to a steady recovery in UK credit and debit card purchases but may disappoint those hoping for a rapid recovery in consumption.
The charts that matter
Aggregate card purchases fell from 106% of average February 2020 spending (pre-Covid) on 5 May 2021 to 95% on 27 May 2021 (see key chart above). Spending on so-called “delayable” and “staple” goods also fell during May (MTD). In contrast, “social” spending rose from 76% to 85% and “work-related” spending increased from 100% to 104%.
May 2021 versus the start of the year – a recovery across the board (Source: ONS; CMMP)
Spending across all categories is higher in relation to pre-COVID levels than in January 2021 but only staples and work-related spending are above pre-COVID levels (see chart above).
CMMP estimates of excess HH savings built up during the COVID-19 pandemic (Source: CMMP)
Spending on delayable goods (eg, clothing, furniture) is a useful indicator of the extent to which the c.£160bn of excess savings built up during the pandemic (see chart above) is returning to the economy via consumption.
Recovery in delayable spending has lost momentum (Source: ONS; CMMP)
These purchases recovered strongly following the reopening on non-essential stores (12 April) to reach recent highs of 122% (19 April) and 112% (5 May) of pre-COVID spending. Momentum has slowed since then, however, with the latest data indicating delayable spending at 91% of pre-COVID levels (see chart above).
Change in index of card purchases YTD (Source: ONS; CMMP)
It is reasonable to expect volatility in faster-indicators and dangerous, therefore, to draw too many conclusions from short-term movements. The core message remains that the consumption is recovering but at a steady rather than rapid pace. Unsurprisingly, the strongest recovery YTD has been in work related spending (see chart above).
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
Synchronised messages from the UK and EA money sectors
The key chart
Don’t misread the messages from macro variables – this is an atypical cycle (Source: BoE; ECB; CMMP)
The key message
It is important not to confuse the decline and recovery in economic activity over the past twelve months with typical economic cycles.
Headline growth figures in key macro variables, including monetary aggregates, have been open to misinterpretation, leading to many false narratives regarding their implications for investment decisions and asset allocation. In this context, CMMP analysis has gone beyond the headlines to identify three key signals that help to interpret current trends in the UK and EA effectively. These signals focus on HH behaviour, the consumption/growth outlook and the policy context.
The messages from the UK and EA money sectors are remarkably consistent in direction if not in magnitude.
Monthly HH deposit flows are moderating in both regions (key signal #1), especially in the EA, suggesting that uncertainty levels are falling. That said, HHs are still repaying down consumer credit (key signal #2), albeit at a slower pace (n.b. the YoY growth rate in consumer credit turned positive in the EA for the first time since last summer). Policy makers still face considerable challenges due to the on-going desynchronization of money and credit cycles, however (key signal #3). The resilience in mortgage demand and on-going house price rises bring additional challenges that complicate policy choices further.
Sustained recoveries require further moderations in HH deposit flows, a recovery in consumer credit, and a resynchronisation in money and credit cycles. The UK displays higher gearing than the EA to each of these key drivers but is lagging the EA in terms of positive signals so far…
Consistent messaging through atypical cycles
The UK and euro area (EA) money sectors have provided consistent messages regarding household (HH) behaviour, the consumption/growth outlook and the policy context in their respective regions throughout the COVID-19 pandemic.
HH monthly money flows as a multiple of 2019 average monthly flows (Source: BoE; ECB; CMMP)
Monthly HH deposit flows provide important insights into HH behaviour. During the pandemic, HHs in both regions increased their money holdings at elevated rates, despite earning negative returns. This behaviour contributed to neither growth nor inflation.
Deposit flows declined in both regions at the start of 2Q21 (see chart above). In the EA, monthly flows fell to €19bn in April 2021 from €62bn in March 2021. This is the first time since March 2020 that these flows have fallen below the €33bn average monthly flows seen during 2019. In the UK, monthly flows fell to £11bn in April 2021 from £16bn in March 2021, the smallest net flow since September 2020. While the direction of travel is the same in both regions, monthly money flows in the UK remain 2.3x above their 2019 average of £5bn.
YoY growth rates in consumer credit (Source: BoE; ECB; CMMP)
While uncertainty is falling in both regions, consumption remains subdued. On a positive note, the YoY growth rate in consumer credit in the EA turned positive (0.3%) for the first time since August 2020 (see chart above). In contrast, growth remained negative in the UK (-5.7%) albeit less negative than the historic low of -10% recorded in February 2021.
That said HHs in both regions repaid consumer credit during April 2021 (see chart below). While this is not a positive signal for growth, the scale of repayments is slowing at least. In the UK, for example, net repayments of £0.4bn was less than seen on average each month over the previous year (£1.7bn).
Monthly flows in UK and EA consumer credit (Source: BoE; ECB; CMMP)
The policy context remains challenging, however, especially for central bankers. The effectiveness of monetary policy relies, in part, on certain stable relationships between monetary aggregates. The desynchronization of money and credit cycles during the pandemic was unprecedented in both the UK and the EA.
Trends in the gap between growth in lending and growth in money supply (Source: BoE; ECB; CMMP)
The gap between YoY growth rates in private sector lending and money supply hit historic highs of 11ppt in the UK in February 2021 and 8ppt in the EA in January 2021. These gaps narrowed to 9ppt and 6ppt respectively in April. Nevertheless, they remain very wide in a historic context (see chart above).
Conclusion
To repeat, it is important not to confuse the decline and recovery in economic activity over the past twelve months with typical economic cycles.
The messages from the UK and EA money sectors are remarkable consistent in direction if not in magnitude. Monthly HH deposit flows are moderating (key signal #1), especially in the EA, suggesting that uncertainty levels are falling. That said, HHs are still repaying down consumer credit (key signal #2), albeit at a slower pace (and the YoY growth rate in consumer credit turned positive in the EA for the first time since last summer). Policy makers still face considerable challenges due to the on-going desynchronization of money and credit cycles, however. The resilience in mortgage demand and on-going house price rises bring additional challenges that complicate policy choices further.
Sustained recoveries require further moderations in HH deposit flows, a recovery in consumer credit, and a resynchronisation in money and credit cycles. The UK displays higher gearing than the EA to each of these key drivers but is lagging the EA in terms of positive signals so far…
Please note that the summary comments and charts above are summaries from more detailed analysis that is available separately.
Trends in global house prices since the GFC (Source: BIS; CMMP)
The key message
Anyone looking for evidence of COVID-19 “herd immunity” need look no further than global housing markets!
House prices rose 4% globally in 2020 in real terms, the fastest rate of growth since the GFC. Prices rose 7% in advanced economies, compared with a more modest 2% in emerging economies. House price resilience during the pandemic reflects many factors: a recovery in HH incomes thanks to continued policy support; lower borrowing costs; reduced supply as construction activity slowed; temporary tax breaks; and perceptions that housing was/is a relatively safe investment.
The combination of rising prices and an uncertain macro backdrop has kept measures of overvaluation elevated. In the euro area, for example, above average increases in house prices occurred in Luxembourg, Slovakia, Estonia, Portugal, Denmark, Austria, the Netherlands and France. With the exception of Estonia, estimates suggested overvaluation in each of these countries before the start of 2020, notably in Luxembourg, Denmark and Austria. Similarly, the Bank of England indicated unease about the UK housing market recently (1 June 2021) after the Nationwide Building Society said that prices were growing at their fastest pace since 2014.
Current EA housing and lending dynamics reflect Minsky’s hypothesis that, over the course of a long financial cycle, there will be a shift towards riskier and more speculative sectors. The flow of funds towards property and financial asset markets (FIRE-based lending) is increasing at the expense of more productive flows to the real economy (COCO-based lending). FIRE-based lending in the EA hit a new high of €5,905bn in April 2021 and accounts for 52% of total lending with negative implications for leverage, growth, stability and income inequality.
Resilience and risks in global housing
Anyone looking for evidence of COVID-19 “herd immunity” need look no further than global housing markets! House prices rose 4% globally in 2020 (in real terms) according to latest BIS data release, the fastest rate of growth since the GFC. Prices are now 21% higher than their average after the GFC (see chart below).
Real price change in 2020 plotted against real price change since the GFC (Source: BIS; CMMP)
Prices rose 7% in “advanced economies” (especially New Zealand, Canada, Denmark, Portugal, Austria, Germany, US) compared with a more modest 2% in “emerging economies.” The resilience of housing markets reflects many factors: a recovery in HH incomes thanks to continued policy support; lower borrowing costs; reduce supply as construction activity slowed; temporary tax breaks; and the perceptions that housing was/is a relatively safe investment.
EA trends – 2020 price change ploted against valuation at end-2019 (Source: ECB; CMMP)
The key risk here is that the combination of rising prices and an uncertain macro backdrop have kept measures of overvaluation elevated.
In their latest Financial Stability Review, for example, the ECB notes that “house price growth during the pandemic has generally been higher for those countries that were already experiencing pronounced overvaluation prior to the pandemic (see chart above).”
The largest/above average increases in house prices during 2020 in the EA occurred in Luxembourg (17%), Slovakia (16%), Estonia (9%), Portugal (9%), Denmark (9%), Austria (7%), the Netherlands (7%) and France (6%). With the exception of Estonia, ECB estimates suggest that house prices were overvalued in each of these countries before the start of 2020, notably in Luxembourg (39% overvalued, not shown in graph above), Denmark (16% overvalued) and Austria (15% overvalued).
On the 7 June 2021, the BIS will release 4Q20 credit and affordability data which will provide further insights into the risks associated with housing trends in the EA and the rest-of-the-world.
The rise in FIRE-based lending in the euro area (Source: ECB; CMMP)
In recent posts, I have noted an adaptation of Hyman Minsky’s hypothesis that states that over the course of a long financial cycle, there will be a shift towards riskier and more speculative sectors.
Minsky’s theory can be applied to the house price trends described above and to HH lending trends described in previous posts. Minsky’s “shift” is reflected in the decline in bank credit to the real sector (COCO-based credit) and an increase in funds flowing towards property and financial asset markets (FIRE-based credit).
FIRE-based lending in the EA hit a new high of €5,905bn in April 2021 and accounts for 52% of total lending with negative implications for leverage, growth, stability and income inequality.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
An important first step in the road to euro area recovery
The key chart
HH monthly money flows as a multiple of 2019 average monthly flows (Source: ECB; CMMP)
The key message
The key message from the money sector at the start of 2Q21 is that the euro area (EA) has taken an important first step in the road to a sustained recovery.
Trends in M3 growth (% YoY) and contributions (ppt) from M1 and private sector credit over the past twenty years (Source: ECB; CMMP)
Recall that the rapid expansion in monetary aggregates during the COVID-19 pandemic was a reflection of DEFLATIONARY forces not inflationary ones, as some argue. Households (HHs) increased their money holdings (boosting M1 and M3) while simultaneously slowing consumption and repaying consumer credit. The key point here was that money sitting idly in overnight deposits contributed to neither growth nor inflation. This time, it really was different (see chart above)!
Trends in monthly HH deposit flows since January 2021 (Source: ECB; CMMP)
At the start of 2Q21, monthly HH deposits flows fell to €19bn in April 2021 from €62bn in March 2021 (key signal #1).
This is the first time since March 2020 that these flows have fallen below the €33bn average monthly flows seen during 2019.
A sustained reduction in monthly deposit flows would indicate reduced uncertainty/improved confidence with positive implications for future consumption and economic growth.
Trends in HH consumer credit since January 2020 (Source: ECB; CMMP)
On a more cautious note, HHs repaid another €1bn of consumer credit (key signal #2) in April 2021, suggesting that the path to recover is still at a very early stage. The YoY growth rate in consumer credit turned positive (0.3%) for the first time since August 2020, but this was due to base effects and was despite the negative monthly flow (see chart above). HHs have repaid consmer credit in six of the past nine months.
The widening gap between growth in lending and growth in money supply (Source: ECB; CMMP)
Similarly, while the gap between money growth and credit growth (key signal #3) has narrowed from its recent historic high of 8ppt in January 2021 to 6ppt in April, it remains very high in a historic context (see chart above). Note that the YoY growth rate in adjusted loans to the private sector decreased to 3.2% in April 2021 from 3.6% in March 2021. Loans to NFCs fell from 5.3% to 3.2% while loans to HHs increased from 3.3% to 3.8% over the month (see chart below).
Trends in mortgage, consumer credit and NFC lending since January 2019 (Source: ECB; CMMP)
In short, one of the three key signals for 2021 has turned positive, while the other two are “less negative.” Not time for Meatloaf to re-release an old hit yet, but welcome signs nonetheless since investment narratives require consistent refuelling.
In my next post, I will explore how and where investment risks may have shifted in the meantime.
Please note that the summary comments and charts above are summaries from more detailed analysis that is available separately.
