The key chart
Tke key message
Investors waiting in anxious anticipation for reflationary messages from the money sector will require some patience yet.
January 2020’s money supply data shows that households (HHs) in the UK and euro area (EA) continue to increase their holdings of liquid assets, money and credit cycles are diverging even further (to new highs), and consumer credit remains very weak. In other words, behind the headline figures, rising money supply in both regions remains a function of deflationary rather than inflationary forces – elevated HH uncertainty, relatively subdued demand for credit, and weak HH consumption. The drivers and implications of rapid money growth in the UK and the EA are very different from past cycles. Behind the headlines, and with three fails so far, the message from the UK and EA money sectors remains the same – “not so fast”.
Three key signals – January 2021
HHs in the UK and the EA continue to increase their holdings of highly liquid assets. In response to the COVID-19 pandemic, the levels of forced and precautionary savings have risen sharply. Today’s (1 March 2021) data release from the BoE, shows UK HHs increasing their money holdings by £18.5bn in January 2021, 4x the average monthly flows recorded in 2019. This is despite the fact that the effective interest rate paid on new time deposits remains at the lowest level (0.42%) since the series began. As noted, in my previous post, January’s monthly flows of HH deposits in the EA (€60bn) also remained almost 2x their 2019 average.
Money sitting idly in savings accounts contributes to neither GDP nor inflation.
Rather than re-synching with each other, money and credit cycles in both regions widened to historic degrees in January 2021. The gap between the YoY growth in UK money (15.0%) and lending (4.4%) widened to a record 10.6ppt in January, while the gap between EA money (12.5%) and lending (4.4%) widened to 8.1ppt. Credit demand remains relatively subdued in both regions, despite the low cost of borrowing, while money supply has accelerated.
Consumer credit growth remains very weak. In the UK, HHs made net repayments of consumer credit of £2.4bn, the largest repayment since May 2020. The annual growth rate of -8.9% is yet another series low since the series began in 1994. Similarly, the -2.5% fall in consumer credit in the EA was the weakest level since February 2014.
Note that consumer credit represents one section of more productive COCO-based lending. It supports productive enterprise since it drives demand for goods and services, hence helping NFCs to generate sales, profits and wages. As before, with HHs hoarding cash and lockdown measure remaining in place, this weakness in consumer credit is not unexpected.
Conclusion
I have explained previously that the drivers and implications of rapid money supply growth in the UK and the EA are very different from past cycles and that the message from the money sectors in both regions for investors positioned for a sustained rise in inflation was, “not so fast.” The message from January’s data releases remains the same. Patience, patience…
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.