The BoE and ECB face different challenges from divergent consumer credit trends
The key chart
UK and EA consumer credit flows expressed as a multiple of pre-pandemic average flows (Source: BoE; ECB; CMMP)
The key message
The Bank of England (BoE) and the ECB face different balancing acts. Both have achieved success in deflating their respective mortgage markets and slowing growth in less-productive FIRE-based lending. Divergent trends in consumer credit demand point to different challenges, however, in terms of balancing household (HH) consumption and inflation (BoE) and HH consumption and growth (ECB).
Increased borrowing is one way that HHs can offset the pressures of falling real incomes. Monthly consumer credit flows in the UK dipped slightly in February 2023 from January’s recent high, but remain 1.2x their pre-pandemic level. In contrast, monthly consumer credit flows in the EA remain well below (0.6x) their respective pre-pandemic level.
Higher interest rates are supposed to deter borrowing and hence reduce aggregate demand and inflation. Resilient UK consumer credit demand suggests that the risks to the BoE’s balancing act lie towards inflation that is more persistent. In contrast, subdued EA consumer credit demand suggests that the risks to the ECB’s balancing act lie towards weaker growth/recession. Neither are easy to manage…
Different balancing acts – the details
UK consumer credit flows
The monthly flow of UK consumer credit decreased to £1.4bn in February 2023, down from the recent high of £1.7bn in January 2023 but above December 2022’s monthly flow of £0.8bn. February’s monthly flow was 1.2x the pre-pandemic flow of £1.2bn. The 3m MVA of UK consumer credit flows remained at £1.3bn, 1.1x the pre-pandemic flow (see chart below).
Trends in UK monthly consumer credit flows (Source: BoE; CMMP)
EA consumer credit flows
The monthly flow of EA consumer credit rebounded to €1.9bn in February, but remained only 0.55x the pre-pandemic average flow of €3.4bn. The 3m MVA flow fell to €1.1bn, from €1.2bn in January, 0.33x the pre-pandemic average flow. They key point here is that, in contrast to trends observed in the UK (and the US), consumer credit flows have failed to recover to their pre-pandemic levels (see chart below).
Trends in EA monthly consumer credit flows (Source: ECB; CMMP)
Conclusion
Trends in consumer credit demand matter because increased borrowing is one way that UK and EA HHs can offset the pressures from falling disposable incomes (along with reduced savings). Consumer credit is also the second most important element of productive COCO-based lending, after corporate debt. It supports productive enterprise since it drives demand for goods and services, hence helping corporates to generate sales, profits and wages.
Higher interest rates are supposed to deter borrowing and hence reduce aggregate demand. Resilient UK consumer credit demand suggests that the risks to the BoE’s balancing act lie towards inflation that is more persistent. In contrast, subdued EA consumer credit demand suggests that the risks to the ECB’s balancing act lie towards weaker growth/recession. Neither are easy…
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
The sound of deflating UK and EA mortgage markets is getting louder
The key chart
Monthly UK and EA mortgage flows expressed as a multiple of pre-pandemic average flows (Source: BoE; ECB; CMMP)
The key message
“Pschitt” – the sound of deflating UK and EA mortgage markets is getting louder.
Monthly mortgage flows have fallen well-below pre-pandemics levels in both regions (only 0.5x in the UK and 0.3x in the EA). Monthly flows have also recorded three and four consecutive months of below pre-pandemic average levels in the UK and EA respectively (on a 3m MVA basis). The rate of slowdown is particularly sharp in the EA. EA monthly flows have fallen from €25.9bn in June 2022 (2.1x pre-pandemic flows) to only €4.2bn in February 2023 (0.3x pre-pandemic flows).
These trends matter because mortgage demand typically displays a co-incident relationship with real GDP. In this context, February’s mortgage data re-enforces the messages from the UK and EA money sectors – central banks continue to tighten policy as the risks to the economic outlook intensify.
“Pschitt…”
Monthly mortgage flows in the UK and EA have fallen well below pre-pandemic level as air continues to escape from the regions’ RRE markets (see key chart above).
The 3m MVA of UK mortgage flows (£1.8bn) fell to 0.5x the pre-pandemic average flow of £3.9bn in February 2023. This marks three consecutive months of below pre-pandemic flows. The 3m MVA of EA mortgage flows (€4.2bn) fell to only 0.3x the pre-pandemic average flow of €12.5bn. The EA has seen four consecutive months of below pre-pandemic flows.
The rate of slowdown in mortgage lending flows is particularly sharp in the EA. Monthly flows have fallen from €25.9bn in June 2022 (2.1x pre-pandemic flows) to €4.2bn in February 2023 (0.3x pre-pandemic flows). This compares with respective multiples of 1.3x (June 2022) and 0.5x (February 2023) for UK mortgage flows.
Monthly mortgage flows – UK details
UK monthly mortgage flow dynamics (Source: BoE; CMMP)
Monthly UK mortgage flows fell to £0.7bn in February 2023, down from £2.0bn in January 2023 (see chart above). In relation to the pre-pandemic period, this is the lowest level of net borrowing since April 2016. February’s flow was only 0.2x the pre-pandemic flow of £3.9bn and well below the recent March 2022 peak of £7.5bn (1.9x pre-pandemic flows.)
The silver lining to these dark clouds was the fact that net approvals for house purchases increased to 43,500 in February from 39,600 in January. This was the first monthly increase in approvals since August 2022 and is important because approvals are an indicator of future borrowing.
Monthly mortgage flows – EA details
EA monthly mortgage flow dynamics (Source: ECB; CMMP)
Monthly EA mortgage flows rebounded to €5.1bn in February 2023, up from €2.8bn in January 2023 (see chart above). February’s flow was still only 0.4x the pre-pandemic average flow of €12.6bn and marks five consecutive months of below pre-pandemic average flows since October 2022.
Why the slowdown in mortgage flows matters
Mortgage demand typically displays a co-incident relationship with real GDP. In this context, February’s data re-enforces the messages from the UK and EA money sectors – central banks continue to tighten policy as the risks to the economic outlook intensify.
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
Three warning signs from the rolling over in EA money and credit cycles
The key chart
Trends in nominal YoY growth rates in M3, M1 and private sector credit (Source: ECB; CMMP)
The key message
As growth in euro area (EA) money supply in February 2023 falls to its slowest rate (2.9% YoY) since October 2014, the “message from the money sector” includes three key warning signs for the ECB and for investors in the region:
Warning sign #1: banks’ top-line growth. Banks continue to experience net outflows of ST liabilities and a substitution away from low-cost overnight deposits to more expensive “other ST deposits”, at the margin (this is not just a US story). At the same time, credit growth is slowing i.e. negative price and volume effects.
Warning sign #2: house prices and household consumption. Monthly flows of mortgage and consumer credit have slowed sharply, to well-below pre-pandemic levels.
Warning sign #3 (re-enforced): weakening economic growth outlook. Leading, coincident and lagging monetary variables are slowing sharply and in a coordinated fashion at a time when access to finance is becoming more difficult and more expensive.
On 16 March 2023, ECB President Lagarde commented that, “we are beginning to see the transmission of our monetary policy.” Eleven days later, the money sector is adding the important detail – increased stresses for banks, households and the economic outlook for the euro area.
Will the “data dependent” central bank listen to its money sector and, if so, how will it respond? The risks of policy mistakes are rising as quickly as money and credit cycles are falling…
Still tightening as stresses mount
Trends in broad money growth since 2003 (% YoY, nominal terms) (Source: ECB; CMMP)
According to the latest ECB “Monetary Developments in the euro area” data release (27 March 2023), growth in broad money (M3) fell to 2.9% YoY in February 2023, down from 3.5% in January 2023 and 4.1% in December 2022. February’s growth rate was the slowest since October 2014.
Trends in broad money growth (% YoY) and breakdown of contribution (ppt) (Source: ECB; CMMP)
The sharp slowdown in narrow money (M1) is a key driver here. Recall that at the point of the January 2021 peak in M3 growth (12.5%), M1 contributed 11.3ppt to this total growth in broad money (see chart above).
This reflected the fact that households (HHs) and corporates (NFCs) were hoarding cash, largely in the form or overnight deposits, despite the fact that they were only earning a return of 0.01%. In stark contrast, narrow money fell -2.7% YoY in February 2023 as overnight deposits fell -2.7% YoY.
As money supply growth slows sharply, the message from the money sector behind these headline figures contains three key warning signs for the ECB and for investors in the region.
Warning sign #1 – banks’ top line growth
Monthly flows of ST liabilities by type (EUR bn) (Source: ECB; CMMP)
Banks continue to experience net outflows of ST liabilities and a substitution away from low-cost overnight deposits to more expensive “other ST deposits”, at the margin. Continuing the theme from “Competing for funding”, EA banks have experienced outflows of ST liabilities in four of the past five months. This reflects six consecutive months of overnight deposits outflows (the blue columns in the chart above). Inflows in other ST deposits (within M2-M1 above) and, to a lesser extent, marketable securities (within M3-M2) have not been able to compensate. They also come at a higher cost.
Trends in private sector credit growth (% YoY) and breakdown of contribution (ppt) (Source: ECB; CMMP)
At the same time, credit growth is slowing. Adjusted private sector credit (PSC) growth peaked recently at 7.1% YoY in September 2022. NFC credit grew 8.9% at this point and made the largest contribution to total loan growth (3.5ppt). HH credit grew 4.4% and contributed 2.3ppt.
By February 2023, PSC growth had slowed to 4.3% YoY. NFC credit growth slowed to 5.7%, but remained the largest contributor to total PSC growth (2.2ppt). HH credit growth slowed to 3.2% YoY, a 1.7ppt contribution to total PSC growth.
Warning sign #2: house prices and household consumption
Trends in monthly mortgage flows (EUR bn) (Source: ECB; CMMP)
Monthly flows of mortgage and consumer credit have slowed sharply to below pre-pandemic levels.Monthly mortgage flows slowed to €5.1bn in February 2023, from €13.7bn a year ago (see chart above). Note that the growth in the outstanding stock of EA mortgages peaked at 5.8% in August 2021 and slowed noticeably after June 2022. February’s growth rate was 3.7% YoY, the slowest growth rate since November 2019.
Monthly consumer credit flows fell to €1.9bn in February 2023 from €3.4bn a year earlier (see chart above). Note that while consumer credit flows have recovered, they have remained below the average pre-pandemic flows of €3.4bn throughout the post-pandemic period. This is in contrast to trends observed in the US and the UK.
Monthly mortgage and consumer credit flows as a multiple of pre-pandemic average flows (Source: ECB; CMMP)
With monthly mortgage and consumer credit flows falling to 0.30x and 0.33x their respective pre-pandemic average monthly flows(see chart above), the EA money sector is sending clear warning signs for future house prices and HH consumption in the region.
Warning sign #3 (re-enforced): weakening economic growth outlook
Trends in real M1, HH credit and NFC credit (% YoY, real terms) (Source: ECB; CMMP)
Leading, coincident and lagging monetary variables are slowing sharply and in a coordinated fashion at a time when access to finance is becoming more difficult and more expensive. Real growth rates in M1, HH credit and NFC credit typically display leading, coincident and lagging relationships with real GDP. The sharp and coordinated slowdown in these variables has been sending warning signs from some months now. If historic relationships between these variables continue, this suggest that economic activity will decelerate over the next quarters.
Conclusion
On 16 March 2023, ECB President Lagarde commented that, “we are beginning to see the transmission of our monetary policy.” Eleven days later, the money sector is adding the important detail – increased stresses for banks, households and the economic outlook for the euro area.
Will the “data dependent” central bank listen to its money sector and, if so, how will it respond? The risks of policy mistakes are rising as sharply as money and credit cycles are falling…
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
Good news for President Lagarde, less positive for EA banks and the economy
The key chart
Trends in composite HH and NFC cost-of-borrowing indicators (%) (Source: ECB; CMMP)
The key message
In the 16 March 2023 ECB press conference, President Lagarde commented that, “we are beginning to see the transmission of our monetary policy.” Her comments reflect the fact that loan demand is slowing across the euro area (EA) as borrowing costs rise and credit standards tighten. Good news for President Lagarde and her colleagues at the ECB, perhaps, but much less positive for EA banks and for the wider economy however. Three key points:
Pressure of banks’ top line growth – net interest income – is rising. Since loan growth peaked in September 2022, the costs of household (HH) and corporate (NFC) deposits have risen faster than the costs of HH and NFC borrowing
Pressure on banks’ credit quality is also rising. Borrowing costs are rising at a much faster rate than in previous hiking cycles, giving borrowers much less time to adjust. Banks were already citing asset quality concerns as a reason to tighten credit standards in 2023. Current trends are unlikely to help
Risks to the outlook for economic growth are tilted to the downside. From (1) and (2), economic growth is likely to slow as the cost of borrowing increases and access to credit becomes harder
Recall that five macro factors are the main drivers of bank sector profitability (and share price performance): the level of ST rates; the level of LT rates; the shape of the yield curve; growth in private sector credit; and growth in GDP.
The bull case for European banks in 4Q22/1Q23 rested largely on valuation and the sensitivity to the first of these five factors (note that c.70% of new loans to HHs and NFCs are on variable rates.) The macro foundations were far from complete, however. Furthermore, the positive impact of rising ST rates on banks net interest income may be overstated for reason (1) above, at least since 3Q22.
The valuation argument remains. Banks’ equity prices appear cheap in absolute terms and in relation to their history, but intensifying macro headwinds help to explain why…
Transmission of our (ECB) monetary policy
Recent trends in EA private sector credit (% YoY) (Source: ECB; CMMP)
Private sector credit (PSC) growth peaked recently at 6.7% YoY in September (see chart above). NFC credit grew 7.8% at this point, and made the largest contribution to total loan growth (3.1ppt). HH credit grew 4.4% and contributed 2.3ppt.
By January 2023, PSC growth had slowed to 4.5% YoY. NFC credit growth slowed to 5.4% YoY, but remained the fastest growing segment and largest contributor to total growth (2.1ppt). HH credit growth also slowed to 3.4% YoY, a 1.8ppt contribution to total growth.
Trends in composite COB indicators (%) (Source: ECB; CMMP)
Bank lending rates are increasing at a faster rate than in previous hiking cycles (see chart above). Over the past twelve months, the composite cost-of-borrowing (CCOB) for NFCs has risen 220bp to 3.36%, the highest level since December 2011. Over the same period, the CCOB for house purchase has risen 177bp to 3.10%, the highest level since April 2013.
Banks are also tightening their lending standards. According to the January 2023 EA bank lending survey, credit standards tightened substantially in 4Q22 for both NFC and HH lending. Banks also indicated that they expected further net tightening of credit standards in both sectors in 1Q23. Banks were already citing asset quality concerns as a reason to tighten credit standards in 2023. Current trends are unlikely to help.
As noted in “Competing for funding”, competition for ST liabilities was intensifying in the EA well before the collapse of Credit Suisse. EA banks experienced outflows of ST liabilities in three of the past four months since October 2022. This reflects four consecutive months of overnight deposit outflows. Inflows of other ST deposits have not been enough to compensate. They also come at a higher cost.
Trends in composite interest rates on new deposits with agreed maturity (%) (Source: ECB; CMMP)
The composite interest rate (CIR) for new NFC deposits with agreed maturity (part of M2-M1) has risen 231bp over the past twelve months to 2.01%. This is the highest rate since January 2009 (see chart above). The CIR for new HH deposits with agreed maturity has risen 140bp over the same period to 1.64%, the highest level since January 2014.
Changes (bp) in COB and CIR indicators since end-September 2022 (Source: ECB; CMMP)
Since September 2022, when volume growth peaked, the rise in the composite cost of NFC and HH deposits has exceeded to rise in the cost of NFC and HH borrowing. The CIR for NFC deposits has risen 127bp while the COB of NFC credit has risen by 123bp. Similarly, the CIR for HH deposits has risen 96bp while the COB of HH credit has risen by only 65bp.
Conclusion
CMMP analysis focuses on the implications of the interaction between the money sector, including central banks and banks, and the real economy. Where are we now?
Money sector (1) – the central bank: President Lagarde is correct to observe that we are beginning to see the transmission of monetary policy. That said, inflation remains at 8.5% (and ranges widely from 4.8% in Luxembourg to 20.1% in Latvia) and is “projected to remain too high for too long”
Money sector (2) – EA banks: loan demand is slowing; pressure on net interest margins is rising and credit quality risks are rising too
The real economy – HHs and NFCs: the cost of borrowing is rising at a much faster rate than in previous hiking cycles and access to credit is also falling
In short, the message from the money sector is aligned with that of the ECB – risks to the outlook for economic growth in the EA are tilted to the downside.
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
Competition for ST liabilities was intensifying even before the collapse of Credit Suisse
The key chart
Trends in EA broad money growth (% YoY) and breakdown of contribution (ppt) (Source: ECB; CMMP)
The key message
Trends in euro area (EA) monetary aggregates were sending important messages about intensifying competition for ST liabilities among the region’s banks even before the collapse of Credit Suisse and the bailing-in of the bank’s AT1 bondholders.
EA banks experienced outflows of ST liabilities in three of the past four months since October 2022. This reflects four consecutive months of overnight deposit outflows. Inflows in other ST deposits and, to a lesser extent, marketable securities have not been enough to compensate. They also come at a higher cost.
Two years ago, EA banks were enjoying inflows of overnight deposits costing 0.01%. Today, at the margin, they are relying more on other ST deposits costing between 1.86% and 2.26% – 172bp and 212bp above the current cost of overnight deposits respectively.
Pressure on banks with weak deposit franchises is increasing in the EA, not just the US!
Competing for funding
Trends in EA monetary aggregates were sending important messages about intensifying competition for ST liabilities among the region’s banks even before the collapse of Credit Suisse and the bailing-in of the bank’s AT1 bondholders.
Trends in EA broad money growth (% YoY) and breakdown of contribution (ppt) (Source: ECB; CMMP)
Recall that broad money (M3) is derived from the liabilities side of the consolidated balance sheet of the euro area money-holding sector. It comprises currency in circulation plus other financial instruments that have a high degree of “moneyness” or liquidity (see chart above):
Narrow money (M1) – currency in circulation plus overnight deposits
Other short term deposits (M2-M1) – deposits with an agreed maturity of up to two years, and deposits redeemable at notice of up to three months
Marketable instruments (M3-M2) – repurchase agreements, money market fund shares, and debt securities with a maturity of up to two years
Note that longer-term liabilities are excluded from the definition of broad money as they are regarded more as portfolio instruments than as a means for carrying out transactions.
Monthly flows (EUR bn) of ST liabilities by type (Source: ECB; CMMP)
Banks experienced outflows of ST liabilities in three of the past four months since October 2022 (see chart above). This reflects four consecutive months of overnight deposit outflows (the blue columns above). Inflows in other ST deposits and, to a lesser extent, marketable securities have not been enough to compensate. They also come at a higher cost.
EA bank interest rates (%) for NFCs and HHs (Source: ECB; CMMP)
Two years ago, banks were enjoying inflows of overnight deposits costing 0.01%. Broad money growth peaked at 12.5% YoY in January 2021. Narrow money (M1), primarily overnight deposits, contributed 11.3ppt to the total growth of 12.5%. Households and corporates were hoarding cash in the form of overnight deposits despite the fact they were only offering a return of 0.01%.
Other ST deposits contributed only 1.3ppt to total growth. Banks were offering -0.05% on deposits with an agreed maturity of up to one year (less than overnight deposits), 0.2% on deposits with an agreed maturity of up to two years, and 0.35% on deposits redeemable at notice of up to three months.
Spread between cost of other ST deposits and overnight deposits (Source: ECB; CMMP)
Today, they are relying more on other ST deposits costing between 1.86% and 2.26%. Growth in broad money (M3) slowed to 3.5% YoY in January 2023. Other ST deposits contributed 3.4ppt to this total growth.
In terms of monthly flows, banks experienced an inflow of €68bn in ST deposits versus and outflow of €89bn in overnight deposits. The inflow is coming from deposits with an agree maturity of up to two years, which cost 172bp and 212bp more than overnight deposits respectively.
Trends and breakdown of EA M3 (EUR bn) (Source: ECB; CMMP)
Conclusion
In short, trends in monetary aggregates are telling us two key things – banks are experiencing a net outflow of ST liabilities and a substitution away from low cost overnight deposits to more expensive, other ST deposits at the margin – n.b. overnight deposits still account for c70% of the outstanding stock of ST liabilities (see chart above).
Competition for funding was intensifying even before the collapse of Credit Suisse and the bail in of the bank’s AT1 bondholders. Pressure on banks with weak deposit franchises is increasing in Europe, not just the US!
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
The largest fall in UK real living standards since records began
The key chart
Trends and OBR forecasts for UK households sector balances (% GDP) (Source: OBR; CMMP)
The key message
Hidden behind the headlines of yesterday’s (15 March 2023) UK budget are three important trends:
The shift from large UK household (HH) surpluses (the main counterpart to government deficits) to…
…little or no net HH savings or borrowings…
…and rising financial inequality
Official OBR forecasts suggest that UK living standards will experience the largest two-year fall in real living standards since records began, bringing real HH disposable income (RHDI) per capita back to 2014-15 levels. Drawdowns on HH savings will not fully compensate for falling RHDIs, hitting consumption and growth in the process.
Expect these trends and rising financial inequality to be centre stage in the build up to the next UK general election – even if they were missing from yesterday’s budget coverage.
Behind a nation of non-savers
UK HHs built up large financial surpluses during the COVID-pandemic and the energy crisis. These surpluses were the main counterpart to the UK government’s large fiscal deficit (see chart below).
The impact of COVID on UK HH and government sector balances (% GDP) (Source: OBR; CMMP)
According to latest OBR forecasts, the HH sector will move from a net lending position in 2022 to balance in 2023, however, as savings are drawn down to support consumption (see key chart above).
What factors are behind a nation of non-savers, and what do they mean for the UK’s economic and political outlook?
Trends and forecasts for RHDI (% YoY) (Source: OBR; CMMP)
The OBR expects RHDI to fall by 2.6% in 2023, as inflation (4.9%) continues to outstrip nominal earnings growth (3.6%). This follows a fall of 2.5% in 2022 (see chart above).
Trends and forecasts for RHDI per capita (£ thousands) (Source: OBR; CMMP)
The OBR also forecasts that RHDI per person (a measure of living standards) will fall by 6% between FY22 and FY 24 – the largest two-year fall in real living standards since records began in the 1950s. If correct, RHDI per person would fall to its lowest level since FY2015 (see chart above).
In response, HHs can either save less, borrow more and/or consume less. The OBR’s forecasts focus on the first factor. HH’s saving is expected to fall to zero in 2023 and 2024 to “support consumption in the face of weak real income growth.” As the “cost-of-living crisis” eases, the savings ratio is forecast to recover to around 1%, still well below the post-financial crisis average (see chart below).
Trends and forecasts for HH savings ratio (% disposable income) (Source: OBR; CMMP)
Lower savings will only partially offset the drop in real incomes, however. This means that private consumption will fall in 2023 by 0.8%. Note that the OBR estimates that this fall would be 1.5ppt higher if the savings ratio remained at 2022 levels. Looking further ahead, the forecasts suggest that consumption growth recovers to an average 1.7% a year out to 1Q28 – better than forecast in November, but still unexciting.
HH savings ratio by income decile (% disposable income) (Source: BoE; CMMP)
What is missing here is the outlook for financial inequality. Lower-income HHs have much less flexibility to adjust their spending in response to rising prices and are less likely to have a cushion of savings to protect them. Recall that HHs in the bottom three income deciles save less than 6% of their gross income. This contrasts with HHs in the top two income deciles who save more than 30% of their gross income (see chart above).
Conclusion
Official forecasts suggest that UK living standards will experience the largest two-year fall in real living standards since records began, bringing real HH disposable income (RHDI) per capita back to 2014-15 levels. Drawdowns on HH savings will not fully compensate for falling RHDIs, hitting consumption and growth in the process.
Expect these trends and rising financial inequality to be centre stage in the build up to the next UK general election – even if they were missing from yesterday’s budget coverage.
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
OBR forecasts present a brighter outlook, but fundamental challenges remain
The key chart
Trends and OBR forecasts for UK sector balances (% GDP) (Source: OBR; CMMP)
The key message
The OBR’s latest “Economic and fiscal outlook” (published 15 March 2023) presents a brighter outlook for the UK economic and fiscal outlook – a shorter and shallower downturn, higher medium term output and lower budget deficits and public debt.
Viewed from our preferred sector balances perspective, however, the forecasts indicate that fundamental challenges and economic imbalances remain.
According to the OBR….
While the Chancellor and other fiscal hawks celebrate lower deficits, the UK’s household (HH) sector will move from a large surplus to a balance as savings are drawn down to support consumption during the squeeze on real disposable incomes. (This means no net HH saving or borrowing over a sustained period – really??). Private consumption will still fall in 2023, however (by 0.8%), as lower savings will only partially offset the decline in incomes.
Corporate (NFC) investment will disappoint too. The NFC sector moves from a modest surplus (ie, disinvestment) to balance as investment picks up, but only gradually.
With the private sector running small surpluses (as opposed to the small deficits forecast in November 2022), borrowing from the rest of the world remains sizeable and persistent.
In short, the OBR expects a return to the pre-pandemic world of economic imbalances. The good news, for what it’s worth, is that the private sector is forecast to run a small surplus rather than a deficit as before (and as predicted in November 2022). The bad news is that the UK economy is forecast to remain heavily dependent on net borrowing from abroad. A familiar story…
Six charts that matter
The impact of COVID on UK domestic sector balances (% GDP) (Source: OBR; CMMP)
Don’t forget the context (see chart above)!
The counterpart to the large government debt built up during the pandemic (-26% GDP, June 2020) was large financial surpluses for UK households (+18% GDP, June 2020) and, to a lesser extent, UK corporations (+7% GDP).
From here, and according to the OBR….
Trends and OBR forecasts for government net borrowing (% GDP) (Source: OBR; CMMP)Trends and OBR forecasts for HH sector balances (% GDP) (Source: OBR; CMMP)Trends and OBR forecasts for NFC sector balances (% GDP) (Source: OBR; CMMP)Trends and OBR forecasts for RoW sector balances (% GDP) (Source: OBR; CMMP)
In short, the OBR expects a return to the pre-pandemic world of economic imbalances (see chart below).
Trends and OBR forecasts for UK sector balances (% GDP) (Source: OBR; CMMP)
The good news, for what it’s worth, is that the private sector is forecast to run a small surplus rather than a deficit as before (and as predicted in the previous OBR forecasts).
The bad news is that the UK economy is forecast to remain heavily dependent on net borrowing from abroad. A familiar story…
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
Trends in monthly US consumer credit flows ($bn) (Source: FED; CMMP)
The key message
The relative resilience of US consumers in relation to their UK and euro area (EA) peers has been an important theme in the post-pandemic “messages from the money sector.”
Monthly US consumer credit flows in December 2022 and January 2023 suggest, however, that demand for consumer credit is moderating sharply.
While it is too early to conclude that the US consumer is cracking, it seems reasonable to expect further moderations in the demand for consumer credit, pressure on US consumption, and more convergence in the messages from the US, UK and EA money sectors in 2023.
Is the US consumer starting to crack?
The US has experienced 29 consecutive months of positive monthly consumer credit flows since August 2020. The latest FED data release for January 2023 (published yesterday, 7 March 2008) showed a monthly flow of $14.8bn, up from $10.7bn in December 2022, but well below the $36.1bn flow recorded in November 2022, however.
The key point here is that the last two months’ flows were below the average pre-pandemic flow of $14.9bm (see key chart above). The 3m MVA of monthly flows ($20.5bn) is still above the pre-pandemic average, so too early to argue that the US consumer is cracking. At least not yet…
Recall that consumer credit is the second largest financial liability for US households (24% total) after mortgages (64% total) and that it displays a relatively stable relationship with disposable personal income. A moderation in demand for consumer credit is entirely consistent with the fact that the consumer credit/disposable personal income ratio is close to the upper end of its historic range at a time of rising rates. Hence, it is also reasonable to expect demand for consumer credit to moderate further, putting pressure on consumption in the process.
Monthly consumer credit flows as a multiple of pre-pandemic averages (Source: FED; BoE; ECB; CMMP)
Recall also that in the face of pressures on real household disposable income, consumers have the option to borrow more, save less and/or consume less. In terms of borrowing more, monthly flows of consumer credit since January 2021 have highlighted the relative resilience of US consumers in relation to their UK and EA peers.
From an asset allocation perspective, it is important to see if the last two months’ trends continue to determine whether this relative resilience is sustainable or whether the messages from the three money sectors will converge further. More to follow in 1Q23…
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
Does the lack of growth in UK corporate lending since 2008 matter?
The key chart
Trends in sterling lending to corporates since 2003 (£bn) (Source: BoE; CMMP)
The key message
The outstanding stock of sterling lending to private sector companies (NFCs) in the UK was £455bn at the end of January 2023. This is £61bn or 12% below the peak of NFC lending back in August 2008.
Does the lack of growth in UK corporate lending since 2008 matter, and if so, why?
NFC lending represents the largest segment of productive “COCO-based lending” i.e. lending that supports both production and income formation. Note that while an increase in NFC lending increases the level of debt in the economy, it also increases the income required to finance it.
Back in July 2015, the UK government argued that the financial services sector, “is critical for supporting the rest of the economy, allocating resources and facilitating long term productive investment.” Fast-forward 90 months, and only 17 pence in every pound lent in the UK supports NFCs is generating sales revenues, wages, profits and economic expansion, however. (This contrasts with 39 cents in every euro lent in the euro area.)
Rather that supporting production and income formation, UK lending has become increasingly skewed towards supporting capital gains largely through higher asset prices (78% of total lending). Mortgages alone account for 53p in every pound lent in the UK, for example.
This is an important part of the context for the Chancellor’s Budget on 15 March 2023. In considering options for stimulating growth in the UK economy, Jeremy Hunt, might ponder the question, “what is the purpose of UK banking?”
Proposals that stimulate investment and encourage a shift back towards more productive forms of bank lending would be welcome.
Please note that the short summary comments and chart above are abstracts from more detailed analysis that is available separately.
An update on the synchronised slowdowns in UK and EA mortgage markets
The key chart
Monthly mortgage flows as a multiple of pre-pandemic flows (Source: BoE; ECB; CMMP)
Synchronised slowdowns
News that UK house prices fell at their sharpest level since 2012 last month (-1.1% YoY) will come as no surprise to those who follow the messages from the money sector and the previous, “Steady as she slows” posts.
Monthly mortgage flows (£bn) and annual growth rate in outstanding stock (RHS) (Source: BoE; CMMP)
The Bank of England’s latest data release (1 March 2023) also showed that net borrowing of mortgage debt by individuals fell to £2.5bn in January 2023 from £3.1bn in December 2022 (see chart above). In both cases, these monthly flows were below the pre-pandemic average of £3.9bn (0.7x and 0.8x respectively).
With net approvals, an indicator of future borrowing, also decreasing to 39,600 in January 2023 from 40,500 in December 2022 (see chart below), it is reasonable to assume that this slowdown will continue.
Trends in UK approvals for house purchase (000s) (Source: BoE; CMMP)
These trends are part of a synchronised slowdown in monthly mortgage flows in both the UK and the euro area (EA). As noted in earlier posts, the slowdown in the EA is even more marked. Monthly mortgage flows fell to €2.8b in January 2023, from €4.6bn in December 2023. In these cases, the monthly flows were only 0.2x and 0.4x the pre-pandemic average flow respectively. More significantly, in Germany and France, the EA’s two largest mortgage markets, there were net repayments in January 2023.
Given that mortgage demand typically displays a coincident relationship with real GDP, the message from the UK and EA money sectors remains one of rising risks to the economic outlook.
The challenging context for central banks remains…
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
