The key chart
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”).
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).
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.
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.
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.
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).
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).
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.
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).
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).
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.