The key chart
The key message
In my previous post, I explained how rising inflation distorts the 2Q22 messages from the euro area’s (EAs) money sector significantly. The same is true for the UK too.
Ignore inflation and the messages from the UK’s money sector are broadly positive for the economic outlook. The three key signals from the UK money sector that I have been following consistently since early 2021 are all sending broadly positive messages – UK HHs have stopped hoarding money, they are borrowing more to fund consumption, and money and credit cycles are re-synching. Growth rates in COCO-based consumer credit and NFC lending are also rising in the UK while the growth in FIRE-based mortgage lending is slowing. Does this sound familiar?
Rising inflation is over-taking these positive trends, however. Lending to private sector companies and households (M4Lex) is falling sharply in real terms (-6.5% YoY). Trends in real HH credit and real NFC credit are slowing sharply and in a coordinated fashion. This matters because these factors typically display coincident and lagging relationships with real GDP.
As in the EA, plenty of information for optimists and pessimists to debate here but with increasing ammunition for the pessimists…
Accounting for inflation – part 2
In the previous post, I explained how rising inflation distorts the 2Q22 messages from the euro area’s (EAs) money sector significantly. The same is true for the UK too.
The good news
Ignore inflation and the messages from the UK’s money sector are broadly positive for the economic outlook.
Monthly HH money flows have moderated slowly, reflecting lower levels of uncertainty. The monthly flow fell from £5.2bn in May 2022 to £1.5bn in June 2022. This is well below the average pre-pandemic flows of £4.6bn and the peak flow of £26bn recorded in May 2020 when HH uncertainty levels peaked at the height of the pandemic crisis (see chart above).
The quarterly HH money flow in 2Q22 was £12.2bn (see chart above). This compares with the average pre-pandemic flows of £11.7bn. The message here is the same – HHs in the UK are no longer hoarding cash in the form of bank deposits. This is reflected, in turn, in the slowdown in broad money growth (see below).
The demand for credit has recovered. Monthly consumer credit flows rose to £1.8bn in June 2022 from £0.9bn in May 2022, well above the pre-pandemic average flows of £1bn. The YoY growth rate of 6.5% was the highest rate of growth since May 2019. Within this, the annual growth rate of credit card borrowing was 12.5% while other forms of consumer credit grew 4.1%. These were the highest rates of growth since November 2005 and March 2020 respectively.
The quarterly flow of consumer credit rose from £3.1bn in 4Q21 and £3.6bn in 1Q21 to £4.2bn in 2Q22 (see chart above). The 2Q22 flow was the largest quarterly flow since 2Q18 and was above the pre-pandemic average of £3.6bn. There have now been five consecutive quarters of positive consumer credit flows, with current flows in-line or slightly above pre-pandemic levels.
After the recent and unprecedented de-synchronisation of money and credit cycles, growth rates in UK money supply and private sector credit are converging (see chart above). The YoY growth rate in money (M4ex) slowed from 5.4% in May 2022 to 4.4% in June 2022. At the same time, the YoY growth rate in lending (M4Lex) fell from 3.9% to 2.3%. While the gap between the two growth rates widened slightly from 1.5ppt to 2.1ppt, it has narrowed considerably from its peak of 11.5ppt in February 2021.
Growth rates in COCO-based consumer credit and NFC lending are rising in the UK while the growth in FIRE-based mortgage lending is slowing (see chart above).
As described above, consumer credit is growing at the fastest rate since May 2019. NFC lending has also recovered to 2.0% YoY, marking five consecutive months of positive YoY growth.
Of course, mortgages remain the largest segment of UK private sector credit (89% of total HH credit and 61% of total PSC). The relative stability of mortgage demand has been a key feature of the messages from the UM money sector for some time. However, net borrowing of mortgage debt decreased from £8.0bn in May 2022 to £5.3bn in June 2022. The YoY growth rate also declined from 4.6% in May 2022 to 3.8% in June 2022, the slowest rate of growth since February 2021. Approvals for house purchases, an indicator of future borrowing, decreased to 63.700 in June 2022 from 65,700 in May. This is below the pre-pandemic average of 66,700.
The bad news
Take inflation into account and the messages are very different, however. Lending to private sector companies and HHs (M4Lex) slowed from 3.9% YoY in May 2022 to 2.3% YoY in June 2022 (see chart above). In real terms, M4Lex fell -6.5% YoY in June 2020, with all forms of lending declining in real terms.
Furthermore, trends in real HH credit and real NFC credit are slowing sharply in a coordinated manner. This matters because these factors typically display coincident and lagging relationships with real GDP over time (see “Look beyond the yield curve” for more details).
Conclusion
The three key signals from the UK money sector that we have been following consistently since early 2021 are all sending broadly positive messages – UK HHs have stopped hoarding money, they are borrowing more to fund consumption, and money and credit cycles are re-synching. Growth rates in COCO-based consumer credit and NFC lending are also rising in the UK while the growth in FIRE-based mortgage lending is slowing.
Rising inflation is over-taking these positive trends, however. Lending to private sector companies and households (M4Lex) is falling sharply in real terms (-6.5% YoY) and traditional coincident and lagging monetary indicators have turned down sharply and in a coordinated fashion. Plenty of ammunition here for pessimists.
The format and presentation of this post mirrors that of the previous post deliberately. Why? Because the messages from the UK and EA money sectors have been very similar during the pandemic. The next post will compare and contrast these trends more closely.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.