Synchronised money cycles and messages from the UK and EA
The key chart
Broad money growth (% YoY) in UK and the euro area (Source: BoE, ECB; CMMP)
The key message
UK and euro area (EA) money cycles remain highly synchronised with the message from both region’s money sectors remaining one of “slowing momentum”.
At the start of 2021, I highlighted three key signals among these messages: are monthly HH deposit flows moderating; is consumer credit recovering; and are money and credit cycles re-synching with each other? The context here being that narrow money (M1) drove the expansion of broad money (M3) in both regions during the pandemic, reflecting the DEFLATIONARY forces of heightened uncertainty, increased (forced and precautionary) savings, reduced consumption and relatively subdued demand for credit.
While monthly flows of HH deposits are well below their respective peaks, they rose in both regions in August, notably in the UK where August’s flow was 2x pre-pandemic levels. Money sitting idly in overnight deposits contributes to neither growth nor inflation. Household uncertainly remains elevated and consumption muted (see also “Delaying the delayable”). Monthly consumer credit flows remain subdued in August and YoY growth rates were -2.4% in the UK and flat in the EA. Money and credit cycles remain out-of-synch with each other, presenting challenges to policy makers and investors alike and reminding us not to confuse current money cycles with previous versions. Furthermore, not only is private sector credit demand relatively subdued, it is also increasingly driven by FIRE-based lending (largely mortgages) rather than more productive COCO-based lending (largely NFC and consumer credit).
Economies and markets have benefitted from changing policy mixes that have been necessary and appropriate. Momentum in the key drivers of a sustained recovery is slowing, however, and further refuelling is required as we enter 4Q21.
Four charts that matter
Monthly HH deposit flows as a multiple of average 2019 monthly flows (Source: BoE; ECB; CMMP)
While monthly flows of HH deposits are well below their respective peaks, they rose in both regions in August, notably in the UK where August’s flow was 2x pre-pandemic levels (see chart above). Money sitting idly in overnight deposits contributes to neither growth nor inflation. Household uncertainly remains elevated and consumption muted.
Annual growth in UK and EA consumer credit (Source: BoE; ECB; CMMP)
Monthly consumer credit flows remain subdued in August and YoY growth rates were -2.4% in the UK and flat in the EA (see chart above).
Lending growth minus money supply growth in the UK and EA (Source: BoE; ECB; CMMP)
Money and credit cycles remain out-of-synch with each other (see chart above), presenting challenges to policy makers and investors alike and reminding us not to confuse current money cycles with previous versions.
Growth rates in private sector credit by type (Source: BoE; ECB; CMMP)
Furthermore, not only is private sector credit demand relatively subdued, it is also increasingly driven by FIRE-based lending (largely mortgages) rather than more productive COCO-based lending (largely NFC credit and consumer credit).
Conclusion
Economies and markets have benefitted from changing policy mixes that have been necessary and appropriate. Momentum in the key drivers of a sustained recovery is slowing, however, and further refuelling is required as we enter 4Q21.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
Little to cheer in the message from the EA money sector
The key chart
Real YoY growth rates in total lending and total minus HH lending (Source: ECB; CMMP)
The key message
This morning’s message from the euro area (EA) money sector provided little cheer for those hoping for a refuelling boost to the region’s recovery/reflation narrative.
Broad money (M3) grew 7.9% YoY in August 2021, from 7.6% YoY in July 2021. However, with narrow money (M1) growing 11.1% YoY and contributing 7.8ppt to the total M3 growth, this marked the impact of deflationary forces rather than inflationary ones.
The monthly HH deposit flow (key signal #1) jumped to EUR51bn in August, from EUR23bn in July, and was 1.5x larger than pre-pandemic flows. Monthly consumer credit (key signal #2) fell to EUR0.1bn, in August from EUR2.0bn and EUR2.4bn in June and July respectively, leaving the YoY growth rate flat in nominal terms. Private sector credit growth slowed to 2.9% YoY in August from 3.1% YoY in July meaning that the gap between private sector credit and money growth (key signal #3) widened again to 5.0ppt in August from 4.6ppt in July – the money and credit cycles remain out-of-synch with each other.
Household credit grew 4.2% YoY in August and contributed 2.2ppt to the total 2.9% growth. Strip out HH lending, however, and private sector credit grew only 0.8% in nominal terms and fell -2.2% in real terms, the slowest rate of real growth since April 2014.
In short, it is not just the motorists queueing outside petrol stations today who are facing refuelling challenges –EA investors are too.
“Refuelling challenges” in six charts
Growth in M3 (YoY %) and contribution on M1 (ppt) (Source: ECB; CMMP)
Broad money (M3) grew 7.9% YoY in August 2021, from 7.6% YoY in July 2021. However, with narrow money (M1) growing 11.1% YoY and contributing 7.8ppt to the total M3 growth, this marked a return of deflationary forces rather than inflationary ones (see chart above).
Monthly HH deposit flows as a multiple of average 2019 monthly flows (Source: ECB; CMMP)
The monthly HH deposit flow (key signal #1) jumped to EUR51bn in August, from EUR23bn in July, and was 1.5 larger than pre-pandemic flows (see chart above). The key point here is that money sitting idly in overnight deposits contributes to neither growth nor inflation.
Monthly consumer credit (key signal #2) fell to EUR0.1bn, in August from EUR2.0bn and EUR2.4bn in June and July respectively, leaving the YoY growth rate flat in nominal terms (see chart above).
Growth in private sector credit (Source: ECB; CMMP)
Private sector credit growth slowed to 2.9% YoY in August from 3.1% YoY in July (see chart above), meaning that the gap between private sector credit and money growth (key signal #3) widened again to 5.0ppt in August from 4.6ppt in July – the money and credit cycles remain out-of-synch with each other (see chart below) creating challenges for policy makers and investors alike.
Growth in PS credit minus growth in broad money (Source: ECB; CMMP)
Household credit grew 4.2% YoY in August and contributed 2.2ppt to the total 2.9% growth (see chart below). Strip out HH lending, however, and private sector credit grew only 0.8% in nominal terms and fell -2.2% in real terms, the slowest rate of real growth since April 2014 (see key chart above).
Drivers of PSC growth by sector (Source: ECB; CMMP)
In short, it’s not just the motorists queueing outside petrol stations today who are facing refuelling challenges – EA investors are too.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
Faster indicators support a “slowing UK momentum” narrative
The key chart
Work-related and delayable card payments versus pre-pandemic levels (Source: ONS; CMMP)
The key message
UK households are delaying spending on so-called “delayable goods” such as clothing and furniture. This matters because this form of spending is a useful indicator of the extent to which the c. £150bn excess savings built up during the pandemic is returning to the UK economy via consumption in a sustained fashion.
Delayable purchases recovered strongly following the re-opening of non-essential stores (12 April) to reach 122% (19 April) and 112% (5 May) of pre-pandemic levels. The latest ONS data release indicates that they fell back to 86% of pre-pandemic levels in the week to 9 September 2021, however (see chart above).
While all forms of credit and debit card spending have recovered from their 2021 lows, only spending on staples and work-related purchases are above pre-pandemic levels (see chart below).
In short, households are spending more in returning to work but the wider message from faster-indicators supports a “slowing UK momentum” narrative.
Credit and debit card payments versus pre-pandemic levels by type (Source: ONS; CMMP)
Please note that the short summary comments and charts above are extracts from more detailed analysis that is available separately
What does the slowdown in UK monetary aggregates mean?
The key chart
Growth (% YoY) in money (M4ex) and lending (M4Lex) over past decade (Source: BoE; CMMP)
The key message
Financial markets are typically sensitive to inflexion points and UK monetary aggregates are “rolling over”. Among the mixed messages, there is the overriding sense of slowing momentum with obvious risks to a sustained recovery and reflation trades.
The expansion in broad money during the pandemic reflected deflationary forces as uncertain households increased their money holdings and delayed consumption. Monthly money flows are moderating now (positive news) but remain elevated in relation to pre-pandemic levels and in relation to euro area dynamics. Growth in consumer credit remains weak in absolute terms (with the exception of niche areas such as the used-car market) again in contrast to EA dynamics. The gap between money growth and credit demand has narrowed from recent highs but remains significant, presenting on-going challenges to policy makers in both regions. The real surprise in July’s UK money supply data, however, was the £1.4bn repayment of mortgage debt, compounded by a slowdown in mortgage approvals.
The overriding message from the rolling over of UK monetary aggregates is one of slowing momentum. So-called “faster indicators” are sending the same message for August too. Uncertainty may be lower than during the height of the pandemic, but any recovery is gradual at best. Sustained recoveries and reflation trades in both the UK and the EA require more substantial foundations.
Rolling over – in charts
UK monetary aggregates are rolling over sending mixed messages to economists, strategists and investors alike (see key chart above). Growth in sterling money (M4ex) slowed to 7.9% YoY in July 2021, down from 8.8% in June 2021 and from February 2021’s recent peak of 15.3%. Growth in sterling net lending (M4Lex) slowed to 1.8% YoY in July 2021, down from 2.4% in June and from its earlier March 2020 peak of 6.6% (the “dash-for-cash”).
Synchronised UK and EA money cycles (Source: BoE; ECB; CMMP)
Money cycles in the UK and the EA remain highly synchronised with broad money growth peaking in February 2021 and January 2021 in the UK and EA respectively (see chart above).
M1 as a percentage of EA and UK broad money (Source: BoE; ECB; CMMP)
The expansion in UK and euro area (EA) broad money during the pandemic reflected deflationary forces as uncertain households increased their money holdings despite earning negative real returns and delayed consumption. Growth in narrow money (and in overnight deposits within narrow money) is the main driver of broad money growth in both regions. Narrow money accounts for 68% and 72% of broad money (M3) in the UK and EA respectively, the highest market shares in both cases. As can be seen in the chart above, the COVID-19 pandemic accelerated the pre-existing trends towards holding liquid assets. The key point here being that money sitting in overnight deposits contributes to neither economic growth nor inflation.
UK monthly HH money flows (£bn) since January 2019 (Source: BoE; CMMP)
Monthly money flows are moderating but remain elevated in relation to pre-pandemic levels and in relation to euro area dynamics. Monthly flows of HH money holdings since March 2020 have far exceeded pre-COVID levels. The two peaks seen in the chart above show monthly flows at 5.9x (May 2020) and 4.4x (December 2020) pre-COVID levels. The chart also illustrates how these flows have followed the timings of lockdowns closely indicating a combination of forced and precautionary savings.
UK and EA money flows as a multiple of pre-COVID levels (Source: BoE; ECB; CMMP)
Uncertainty levels have peaked in both regions but UK monthly flows are still 1.5x pre-pandemic levels. A moderation on HH money flows was the first of three key signals from the money sector identified at the start of this year. As can be seen in the chart above, the UK is lagging the EA in terms of a return to normality in this context. Monthly HH deposit flows in the EA have been at or below pre-COVID levels since April 2021.
Monthly flows (%, LHS) and growth rate (% YoY, RHS) in consumer credit (Source: BoE; CMMP)
Growth in consumer credit remains weak with the exception of niche areas such as the used-car market. UK individuals borrowed no additional consumer credit in July 2021. The Bank of England noted that, “Within this, they borrowed an additional £0.1bn in ‘other’ forms of consumer credit (such as car dealership finance and personal loans), offset by net credit card repayments of £0.1bn.” (Money and Credit, July 2021).
Annual growth rates in UK and EA consumer credit (Source: BoE; ECB; CMMP)
The annual growth rate in consumer credit also remained weak, decreasing to -2.7% YoY in July from -2.2% YoY in June. Here again the UK is lagging the EA in terms of a return to normality (key signal #2). The YoY growth rate in consumer credit turned positive in the EA in April 2021 and has average 0.5% since then (see chart above).
Lending growth minus money supply growth in the UK and EA (Source: BoE; ECB; CMMP)
The gap between money growth and credit demand has narrowed from recent highs but remains significant, presenting on-going challenges to policy makers (key signal #3). The ideal scenario would see a reduction in the deflationary forces that drove M3 growth during the pandemic combined with a recovery in (productive) lending to the private sector. The peak UK gap (11.4ppt) occurred in February 2021 when money supply increased by 15.3% YoY while lending grew by only 3.9% YoY. The gap narrowed to 6.1ppt in July 2021. Money supply growth slowed to 7.9% YoY but lending has also slowed to 1.8%. As can be seen from the chart above the same dynamics can be observed in both the UK and the EA.
Monthly UK retail lending flows (£bn) and breakdown (Source: BoE; CMMP)
The real surprise in July’s UK money supply data was the £1.4bn repayment of mortgage debt compounded by a slowdown in mortgage approvals. Resilient mortgage demand had been the key feature of UK retail finance during the pandemic, offsetting weakness in consumer credit (see chart above). In July 2021, however, HHs repaid £1.4bn of mortgage debt (red data labels in chart above). This is only the second recorded net repayment in the past decade. It followed record £18bn borrowing in June, which was boosted by the tapering off of the stamp duty holiday. Looking forward, approvals for house purchases, an indicator of future borrowing trends, fell to 75,200, the lowest level since July 2020 but above pre-pandemic levels (see chart below).
UK approvals for house purchases (Source: BoE; CMMP)
Conclusion
Financial markets are typically sensitive to inflexion points. The overriding message from the rolling over of UK monetary aggregates is one of slowing momentum. So-called “faster indicators” are sending the same message for August (see chart below).
Aggregate card spending versus pre-COVID levels (Source: ONS; CMMP)
Uncertainty may be lower than during the height of the pandemic, but any recovery is gradual at best. Sustained recoveries and reflation trades in both the UK and the EA require more substantial foundations.
Please note that the summary comments above are extracts from more detailed analysis that is available separately.
