China data reinforces three key aspects of global debt dynamics
The key chart
The chart from 2019 – China’s HH credit growth outstripping GDP growth despite the fact that the HH debt ratio was close to the average for all BIS reporting countries (Source: BIS; CMMP)
The key message
This week’s news of weaker-than-expected economic growth in China and on-going challenges in the country’s property sector reinforces three key aspects of global debt dynamics:
Conventional macro thinking is flawed to the extent that it typically ignores the risks associated with private debt (while seeing government debt as a problem)
The “EM-debt” story has, for some time, been replaced by the “China-debt” story – strip out China and EM’s share of global debt is largely unchanged since the GFC
The level of any country’s debt needs to be considered in relation to its rate of growth (and its affordability and structure).
In an early 2019 CMMP Analysis report (“Too much, too soon?“), I concluded that:
“The risks associated with excess HH credit growth in China remain elevated and this analysis presents a relatively extreme example of the importance of considering the level of debt together with its rate of growth. History suggests that current trends in China are unsustainable. The most benign outcome is that the rate of growth in HH borrowing slows more rapidly with negative implications for consumption and aggregate demand. In short, China’s increasing HH debt burden represents a key headwind in the transition to a consumption-driven economy.”
Debt dynamics matter, a lot, but conventional approaches to understanding them need updating.
Inflation and falling real incomes affecting patterns more than levels of spending
The key chart
Credit and debit card payments in relation to pre-pandemic levels (Source: ONS; CMMP)
The key message
The message from the UK money sector is still one of resilient consumer spending, despite rising inflation and falling real incomes. Monthly spending on credit and debit cards in June 2022 was 1% above pre-pandemic levels and 6ppt above the level of monthly spending a year earlier.
UK households (HH) are increasing spending the most on getting to work and on staples. Spending on these categories was 32% and 13% above pre-pandemic levels in June 2022. Social spending was 1% above pre-pandemic levels, but spending on delayable goods such as clothing and furniture was still 16% below pre-pandemic levels.
Over the past 12 months, social spending and work-related spending have increased the most. Social spending has increases 18ppt from 83% pre-pandemic levels to 101% of pre-pandemic levels. Work related spending has increased 20ppt from 112% pre-pandemic levels to 132% pre-pandemic levels.
Delayable spending is the only spending category that (1) has fallen over the past twelve months and (2) remains below pre-pandemic levels. Delayable spending has fallen from 89% pre-pandemic levels in June 2021 to 84% pre-pandemic levels in June 2022. This matters because delayable spending is our preferred indictor regarding the extent to which excess savings are returning to the economy in a sustained fashion.
In short, the impact of rising inflation and falling real incomes is evident more on spending patterns than on the overall level of spending. UK HHs are increasing spending more on getting to work and on staples, unsurprisingly, and less on items such as clothing and furniture. Daily spending data through to 21 July 2022 is consistent with these monthly trends.
Please note that the summary comments and chart above are extracts from more detailed analysis that is available separately.
Are the UK and EA money sectors still sending consistent messages?
The key chart
Trends in UK and EA broad money (Source: BOE; ECB, CMMP)
The key message
The messages from the UK and euro area (EA) money sectors were remarkably consistent during the COVID-19 pandemic. Are they still sending consistent messages now?
Growth in broad money rose sharply in both regions during the pandemic, peaking in 1Q21. Growth in narrow money (M1), and overnight deposits with banks within this, was the main driver of broad money growth. UK and EA households (HHs) were increasing savings and delaying consumption – deflationary rather than inflationary forces. Note, in this context, that growth in private sector credit (key assets of banks) did not match the growth in broad money (key ST liabilities of banks). Indeed the gap between money growth and lending growth reached historically high levels in 1Q21. These were atypical money and credit cycles.
Broad money growth has slowed down to pre-pandemic levels now. UK and EA HHs are no longer hoarding cash. The demand for consumer credit has recovered with the largest quarterly flows since the recovery began in 2Q21. Consumer credit demand has returned to pre-pandemic levels in the UK but has still to recover fully in the EA. Growth rates in money supply and private sector credit have also re-aligned as money and credit cycles have re-synched with each other. In the EA, lending growth exceeded money supply growth in June 2022 for the first time since October 2011. The contribution of productive COCO-based lending has also increased in both regions. In the EA, for example, NFC lending grew faster than mortgages in June 2022.
In short, the key signals that I have been following consistently since early 2021 are all sending broadly positive messages for the economic outlook in both the UK and EA. The money sectors are still sending consistent messages, albeit with slightly different areas of emphasis.
The UK is more geared towards a recovery in consumer credit and has benefited from a stronger recovery here. Overall credit growth is slowing in the UK, however. The EA has seen a more promising recovery in lending to NFC and credit growth is still accelerating (in nominal terms).
As highlighted in the previous two posts, rising inflation has overshadowed all of these positive developments in the EA and the UK, however. Credit growth is negative in real terms in both regions, and leading, coincident and lagging monetary indicators are slowing sharply and in a coordinated fashion.
The synchronisation in the messages from the UK and EA money sectors extends to both the good and the bad news. Plenty for optimists and pessimists to debate here…
Still in-synch?
The messages from the UK and euro area (EA) money sectors were remarkably consistent during the COVID-19 pandemic. Are they still sending consistent messages now?
The impact of the COVID-19 pandemic
The impact of COVID-19 on UK and EA broad money growth (Source: BoE; ECB; CMMP)
Growth in broad money rose sharply in both regions to peak in 1Q21 (see chart above). In the UK, the YoY growth rate in M4ex rose from 7.5% in March 2020 to a peak of 15.4% in February 2021. In the EA, the growth rate in M3 rose from 7.5% in March 2020 to a peak of 12.5% one month earlier in January 12.5%.
Narrow money as %age of broad money in the UK and EA (Source: BoE; ECB; CMMP)
Growth in narrow money (M1), and overnight deposits with banks within this, was the main driver of broad money growth. M1 currently accounts for 69% of UK M3 and 73% of EA M3, up from 48% and 51% respectively a decade earlier. This means that UK and EA households (HHs) were increasing savings and delaying consumption during the pandemic – deflationary rather than inflationary forces.
Put simply, money sitting idly in bank deposits contributes to neither growth nor inflation.
The gap between UK and EA lending and money supply growth (Source: BoE; ECB; CMMP)
Note that the growth in broad money (bank’s ST liabilities) was not matched by growth in private sector credit (banks’ assets). Indeed the gap between growth in money and growth in lending reached historic highs in 1Q21. In short, the money and credit cycles had moved out-of-synch with each other, and to a record extent.
The recovery from COVID-19
Trends in UK and EA broad money (Source: BOE; ECB, CMMP)
Broad money growth has slowed down to pre-pandemic levels now (see chart above). In June 2022, growth in M4ex had slowed to 4.4% in the UK and growth in M3 had slowed to 5.7% in the EA. These represent the slowest rates of growth since January 2020 and February 2020 respectively.
Monthly HH money flows as a multiple of pre-pandemic average flows (Source: BoE; ECB; CMMP)
HHs are no longer hoarding cash. In the UK, monthly HH money flows fell to £1.5bn in June 2022, 0.3x the average pre-pandemic flow of £4.7bn. In the EA, monthly HH deposit flows fell to €8.5bn, again this is 0.3x the average pre-pandemic flow of €33bn (see chart above).
The demand for consumer credit has recovered with the largest quarterly flows since the recovery began in 2Q21. At the peak of the crisis in 2Q20, UK and EA HHs repaid £13.2bn and €12.9bn in consumer credit respectively. More recently, we have seen five consecutive quarters of positive consumer credit flows (see chart above).
Consumer credit demand has returned to pre-pandemic levels in the UK but has still to recover fully in the EA. In the 2Q22, UK consumer credit flows recovered to £4.2bn, above the pre-pandemic average of £3.6bn. EA consumer credit flows also recovered to €7.5bn, but they remain below the pre-pandemic average of €10.8bn.
Annual growth rates in UK and EA consumer credit (Source: BoE; ECB; CMMP)
Annual growth rates in consumer credit have also recovered to post-pandemic highs, to 6.5% in the UK and 3.3% in the EA in June 2022. Note the relative gearing of the UK here (see chart above). Consumer credit growth slowed faster and recovered stronger in the UK than in the EA.
Trends in the gap between UK and EA lending and money supply growth (Source: BoE; ECB; CMMP)
Growth rates in money supply and private sector credit have also re-aligned as money and credit cycles have re-synched with each other (see chart above). In the EA, lending growth exceeded money supply growth in June 2022 for the first time since October 2011. In the UK, lending growth still lagged money supply growth by 2.1ppt in June 2022, but this is much narrower than the peak gap of 11.5ppt seen in February 2021.
Trends in UK and EA bank lending by type (Source: BoE; ECB; CMMP)
The contribution of productive COCO-based lending has increased in both regions. In the EA, NFC lending grew faster (5.9%) than mortgages (5.3%) in June 2022. Less productive, mortgage lending remains resilient in the EA, but its growth is slowing in the UK (see chart above).
Conclusion
In short, the key signals that I have been following consistently since early 2021 are all sending broadly positive messages for the economic outlook in both the UK and EA. The UK has benefited from a stronger recovery in consumer credit. The EA has seen a more promising recovery in lending to NFC.
As highlighted in the previous two posts, rising inflation has overshadowed all of these positive developments, however (see “Accounting for inflation” and “Accounting for inflation – part 2”). Credit growth is negative in real terms in both the UK and EA, and leading, coincident and lagging monetary indicators are slowing sharply and in a coordinated fashion.
The synchronisation in the messages from the UK and EA money sectors extends to both the good and the bad news. Plenty for optimists and pessimists to debate here…
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
