What to look for in the OBR’s “Economic and Fiscal Outlook”
The key chart
Actual and OBR forecasts for UK private and public sectoral net lending (% GDP) (Source: OBR; CMMP)
The key message
On Wednesday this week (27 October 2021), the OBR will publish its latest “Economic and fiscal outlook”. Among the 200+ pages of detailed analysis and forecasts, one page and one chart are key – “sectoral net lending” (typically around page 70!). This examines the impact of expected income and expenditure of the three economic sectors (private, public and RoW) for the path of each sector’s net lending to, or borrowing from, the others. A core element of CMMP analysis.
The previous outlook (March 2021) assumed that the two domestic sectors would return to running simultaneous net financial deficits in 2022 and described this situation as “more usual.” Of course, this is only possible if the RoW runs a compensating net financial surplus at the same time (ie current account surplus vis-à-vis the UK).
In short, existing official forecasts assume persistent and significant fiscal and current account deficits between 2022 and 2026. From a CMMP perspective, this is neither usual nor sustainable. Hence our attention will naturally focus on any revisions to these assumptions. Watch this space…
Neither usual, not sustainable
The OBR will publish its “Economic and fiscal outlook” (EFO) for the UK on Wednesday October 2021. The EFO sets out the Office’s forecasts for the economy and the public finances and provides an assessment of whether the Government is likely to achieve its fiscal targets. From a CMMP perspective, the key section is the one page summary of sectoral net lending. Specifically, the impact of expected income and expenditure of different economic sectors for the path of each sector’s net lending to, or borrowing from, the others.
In the previous EFO (March 2021), the OBR argued that, “Over the medium term, sectoral lending positions return to more usual levels. As can be seen from the key chart above, this assumed that the two domestic sectors would both be running simultaneous net financial deficits (ie, both spending more than they earn). Note that, in the case of a simple two-sector economy, it would be impossible for the private and public sectors to be running deficits at the same time.
Actual and OBR forecasts for UK private and public and RoW sectoral net lending (% GDP) (Source: OBR; CMMP)
Of course, in practice the two domestic sectors are linked economically to foreign FIs, NFCs, HHs and governments, collectively termed the rest-of-the-world (RoW). From this, we can see that the previous OBR forecasts assume that the RoW would run compensating net financial surpluses (current account surpluses) vis-à-vis the UK domestic sectors.
In short, existing forecasts assume significant and persistent fiscal and current account deficits from 2022-2026. From a CMMP perspective, this is neither usual nor sustainable. Hence, our attention will naturally turn to the revised assumptions this week…
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
UK card payments trending below pre-pandemic levels
The key chart
Aggregate card payments in relation to pre-pandemic levels (Source: ONS; CMMP)
The key message
Despite accumulating close to £160bn in excess savings during the pandemic, UK households (HHs) appear reluctant to “bash their plastic”.
All categories of credit and debit card payments – delayable, social, staples and work-related – have recovered strongly during 2021. Unsurprisingly, the biggest increases have occurred in social and work-related payments with the easing/lifting of restrictions. Aggregate payments peaked at 106% of pre-pandemic levels on 5 May 2021, however, and have been trending slightly below pre-pandemic levels ever since.
HHs have been spending more on getting to work recently than on delayable items such as clothing and food, with the recent fuel shortages creating an additional, albeit temporary spike, in the former type of spending.
Significantly, delayable spending peaked at 121% of pre-pandemic levels a week after the lifting of restrictions on the opening of non-essential stores on 12 April 2021 and have fallen back to 92% of pre-pandemic levels now. This matters because spending on delayable goods is a useful indicator regarding the extent to which excess savings are returning to the economy via HH consumption in a sustained fashion.
The on-going message from the money sector here is that while the direction of travel in HH consumption has been positive YTD, momentum has slowed. This is consistent with historical evidence that suggests (1) that HHs take time to respond to shocks, (2) that unanticipated increases in HH wealth tend to be saved rather than spent; and (3) that excess savings were built up by HHs with relatively low marginal propensities to consume.
The six charts that matter
CMMP estimates for excess HH savings built up during the pandemic (Source: ONS; CMMP)
Despite accumulating close to £160bn in excess savings during the pandemic (see chart above), UK households (HHs) appear reluctant to “bash their plastic”.
Card payments in relation to pre-pandemic levels by spending category (Source: ONS; CMMP)
All categories of credit and debit card payments – delayable, social, staples and work-related – have recovered strongly during 2021 (see chart above). Unsurprisingly, the biggest increases have occurred in social and work-related payments with the easing/lifting of restrictions (see chart below).
Change (ppt) in relative payments since end-2000 by category (Source: ONS; CMMP)
Aggregate payments peaked at 106% of pre-pandemic levels on 5 May 2021, however, and have been trending slightly below pre-pandemic levels ever since (see chart below).
Aggregate card payments in relation to pre-pandemic levels since end-2020 (Source: ONS; CMMP)
HHs have been spending more on getting to work recently than on delayable items such as clothing and food, with the recent fuel shortages creating an additional, albeit temporary spike, in the former type of spending (see chart below).
Payments on delayable and work-related goods in relation to pre-pandemic levels (Source: ONS; CMMP)
Significantly, delayable spending peaked at 121% of pre-pandemic levels a week after the lifting of restrictions on the opening of non-essential stores on 12 April 2021 and have fallen back to 92% of pre-pandemic levels now (see chart below). This matters because spending on delayable goods is a useful indicator regarding the extent to which excess savings are returning to the economy via HH consumption.
Aggregate and delayable goods payments in relation to pre-pandemic levels (Source: ONS; CMMP)
Conclusion
The on-going message from the money sector here is that, while the direction of travel in HH consumption has been positive YTD, momentum has slowed. This is consistent with historical evidence that suggests (1) that HHs take time to respond to shocks, (2) that unanticipated increases in HH wealth tend to be saved rather than spent; and (3) that excess savings were built up by HHs with relatively low marginal propensities to consume.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
It’s the economy, not the budget, that has to balance
The key chart
UK financial sector balances (4Q rolling averages, £bn) (Source: ONS; CMMP)
The key message
Note to Rishi – a “pragmatic” and “responsible” fiscal outcome for the UK is one that delivers a balanced economy not a balanced budget.
Pre-COVID, the UK was running large and persistent sector imbalances and was increasingly reliant on the rest-of-the-world (RoW) as a net lender. The HH sector, which plays a critical role in the UK economy (FCE/GDP) and bank lending, had been funding consumption by dramatically reducing its savings rate and accumulation of net financial assets and was poised to disappoint.
In the face of the pandemic, the UK private sector shifted to an unprecedented net lending position of 21% GDP, 13ppt above the 4Q09 post-GFC peak. The HH sector alone moved from a net borrowing position of 0.4% GDP in 3Q19 to a net lending position of 15% GDP in 2Q20 as the HH savings ratio rose to a record high of 23% GDP. Extraordinary and co-ordinated responses to these extraordinary times came from the UK government and the Bank of England, including extensions to the furlough scheme and increases in the central bank’s buying programme. The responses were both timely and appropriate. The UK government increased its net borrowing positions to 25% GDP in 2Q20 and 14% in 3Q20.
According the latest ONS statistics, the net lending position of the UK private sector was still 6% GDP at the end of 2Q21, down from 10% in the previous quarter but still well above the LT (pre-COVID) average of just under 1% GDP. Both non-financial and financial corporations increased their net lending positions in 2Q21 to 1% of GDP respectively. In contrast, the HH’s net lending position fell from 9% GDP (£52bn) in 1Q21 to 5% GDP (£27bn) in 2Q driven by a recovery in spending. Note, however, that it remains double its LT average. On a positive note, the HH savings rate fell to 12% in 2Q21 from 18% in 1Q21 (the second highest rate on record).
The recent messages from the UK money sector suggest that HHs remain uncertain with monthly HH deposit flows rising again in August to double their pre-pandemic levels and demand for consumer credit remaining weak. So-called “faster-indicators” also indicate that credit and debit card payments remain below their pre-pandemic levels.
As the UK emerges from the COVID pandemic, large sector imbalances remain but in very different ways to the pre-COVID period. The private sector continues to disinvest, HHs remain uncertain and credit demand (ex-mortgages) remains subdued. UK HHs have built up c£160bn of excess savings during the pandemic but history suggests that (1) they take time to respond to shocks and (2) that unanticipated increases in wealth tend to be saved rather than spent. The co-ordinated fiscal and monetary policy response to the pandemic was timely and appropriate but it remains premature to be discussing significant fiscal adjustments and/or an end to “bigger government”.
Contrary to some of the current political rhetoric, budget outcomes are inappropriate goals in themselves. The correct budget outcome is the one that delivers a balanced economy, not a balanced budget.
Pre-COVID, the UK was running large and persistent sector imbalances and was increasingly reliant on the rest-of-the-world (RoW) as a net lender (see chart above). The HH sector, which plays a critical role in the UK economy (FCE/GDP) and bank lending, had been funding consumption by dramatically reducing its savings rate and accumulation of net financial assets and was poised to disappoint (see chart below).
Poised to disappoint – HH gross savings and savings ratio (Source: ONS; CMMP)Private sector net lending position as % GDP (Source: ONS; CMMP)
In the face of the pandemic, the UK private sector shifted to an unprecedented net lending position of 21% GDP, 13ppt above the 4Q09 post-GFC peak (see chart above). The HH sector alone moved from a net borrowing position of 0.4% GDP in 3Q19 to a net lending position of 15% GDP in 2Q20 as the HH savings ratio rose to a record high of 23% GDP (see chart below).
A record high in HH savings (Source: ONS; CMMP)
Extraordinary and co-ordinated responses to these extraordinary times came from the UK government and the Bank of England, including extensions to the furlough scheme and increases in the central bank’s buying programme. The responses were both timely and appropriate (see chart below). The UK government increased its net borrowing positions to 25% GDP in 2Q20 and 14% in 3Q20.
UK policy responses from a sector balances perspective (Source: ONS; CMMP)
According the latest ONS statistics, the net lending position of the UK private sector was still 6% GDP at the end of 2Q21, down from 10% in the previous quarter but still well above the LT (pre-COVID) average of just under 1% GDP. Both non-financial and financial corporations increased their net lending positions in 2Q21 to 1% of GDP respectively (see chart below).
Breakdown of private sector net financial balances (Source: ONS; CMMP)
In contrast, the HH’s net lending position fell from 9% GDP (£52bn) in 1Q21 to 5% GDP (£27bn) in 2Q driven by a recovery in spending. Note, however, that it remains double its LT average (see chart below). On a positive note, the HH savings rate fell to 12% in 2Q21 from 18% in 1Q21 (the second highest rate on record). The recent messages from the UK money sector suggest that HHs remain uncertain with monthly HH deposit flows rising again in August to double their pre-pandemic levels and demand for consumer credit remaining weak. So-called “faster-indicators” also indicate that credit and debit card payments remain below their pre-pandemic levels.
HH sector net lending position (Source: ONS; CMMP)
Conclusion
As the UK emerges from the COVID pandemic, large sector imbalances remain but in very different ways to the pre-COVID period. The private sector continues to disinvest, HHs remain uncertain and credit demand (ex-mortgages) remains subdued. UK HHs have built up c£160bn of excess savings during the pandemic but history suggests that (1) they take time to respond to shocks and (2) that unanticipated increases in wealth tend to be saved rather than spent.
The co-ordinated fiscal and monetary policy response to the pandemic was timely and appropriate but it remains premature to be discussing significant fiscal adjustments and/or an end to “bigger government”. Contrary to some of the current political rhetoric, budget outcomes are inappropriate goals in themselves. The correct budget outcome is the one that delivers a balanced economy, not a balanced budget.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
Synchronised money cycles and messages from the UK and EA
The key chart
Broad money growth (% YoY) in UK and the euro area (Source: BoE, ECB; CMMP)
The key message
UK and euro area (EA) money cycles remain highly synchronised with the message from both region’s money sectors remaining one of “slowing momentum”.
At the start of 2021, I highlighted three key signals among these messages: are monthly HH deposit flows moderating; is consumer credit recovering; and are money and credit cycles re-synching with each other? The context here being that narrow money (M1) drove the expansion of broad money (M3) in both regions during the pandemic, reflecting the DEFLATIONARY forces of heightened uncertainty, increased (forced and precautionary) savings, reduced consumption and relatively subdued demand for credit.
While monthly flows of HH deposits are well below their respective peaks, they rose in both regions in August, notably in the UK where August’s flow was 2x pre-pandemic levels. Money sitting idly in overnight deposits contributes to neither growth nor inflation. Household uncertainly remains elevated and consumption muted (see also “Delaying the delayable”). Monthly consumer credit flows remain subdued in August and YoY growth rates were -2.4% in the UK and flat in the EA. Money and credit cycles remain out-of-synch with each other, presenting challenges to policy makers and investors alike and reminding us not to confuse current money cycles with previous versions. Furthermore, not only is private sector credit demand relatively subdued, it is also increasingly driven by FIRE-based lending (largely mortgages) rather than more productive COCO-based lending (largely NFC and consumer credit).
Economies and markets have benefitted from changing policy mixes that have been necessary and appropriate. Momentum in the key drivers of a sustained recovery is slowing, however, and further refuelling is required as we enter 4Q21.
Four charts that matter
Monthly HH deposit flows as a multiple of average 2019 monthly flows (Source: BoE; ECB; CMMP)
While monthly flows of HH deposits are well below their respective peaks, they rose in both regions in August, notably in the UK where August’s flow was 2x pre-pandemic levels (see chart above). Money sitting idly in overnight deposits contributes to neither growth nor inflation. Household uncertainly remains elevated and consumption muted.
Annual growth in UK and EA consumer credit (Source: BoE; ECB; CMMP)
Monthly consumer credit flows remain subdued in August and YoY growth rates were -2.4% in the UK and flat in the EA (see chart above).
Lending growth minus money supply growth in the UK and EA (Source: BoE; ECB; CMMP)
Money and credit cycles remain out-of-synch with each other (see chart above), presenting challenges to policy makers and investors alike and reminding us not to confuse current money cycles with previous versions.
Growth rates in private sector credit by type (Source: BoE; ECB; CMMP)
Furthermore, not only is private sector credit demand relatively subdued, it is also increasingly driven by FIRE-based lending (largely mortgages) rather than more productive COCO-based lending (largely NFC credit and consumer credit).
Conclusion
Economies and markets have benefitted from changing policy mixes that have been necessary and appropriate. Momentum in the key drivers of a sustained recovery is slowing, however, and further refuelling is required as we enter 4Q21.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
Little to cheer in the message from the EA money sector
The key chart
Real YoY growth rates in total lending and total minus HH lending (Source: ECB; CMMP)
The key message
This morning’s message from the euro area (EA) money sector provided little cheer for those hoping for a refuelling boost to the region’s recovery/reflation narrative.
Broad money (M3) grew 7.9% YoY in August 2021, from 7.6% YoY in July 2021. However, with narrow money (M1) growing 11.1% YoY and contributing 7.8ppt to the total M3 growth, this marked the impact of deflationary forces rather than inflationary ones.
The monthly HH deposit flow (key signal #1) jumped to EUR51bn in August, from EUR23bn in July, and was 1.5x larger than pre-pandemic flows. Monthly consumer credit (key signal #2) fell to EUR0.1bn, in August from EUR2.0bn and EUR2.4bn in June and July respectively, leaving the YoY growth rate flat in nominal terms. Private sector credit growth slowed to 2.9% YoY in August from 3.1% YoY in July meaning that the gap between private sector credit and money growth (key signal #3) widened again to 5.0ppt in August from 4.6ppt in July – the money and credit cycles remain out-of-synch with each other.
Household credit grew 4.2% YoY in August and contributed 2.2ppt to the total 2.9% growth. Strip out HH lending, however, and private sector credit grew only 0.8% in nominal terms and fell -2.2% in real terms, the slowest rate of real growth since April 2014.
In short, it is not just the motorists queueing outside petrol stations today who are facing refuelling challenges –EA investors are too.
“Refuelling challenges” in six charts
Growth in M3 (YoY %) and contribution on M1 (ppt) (Source: ECB; CMMP)
Broad money (M3) grew 7.9% YoY in August 2021, from 7.6% YoY in July 2021. However, with narrow money (M1) growing 11.1% YoY and contributing 7.8ppt to the total M3 growth, this marked a return of deflationary forces rather than inflationary ones (see chart above).
Monthly HH deposit flows as a multiple of average 2019 monthly flows (Source: ECB; CMMP)
The monthly HH deposit flow (key signal #1) jumped to EUR51bn in August, from EUR23bn in July, and was 1.5 larger than pre-pandemic flows (see chart above). The key point here is that money sitting idly in overnight deposits contributes to neither growth nor inflation.
Monthly consumer credit (key signal #2) fell to EUR0.1bn, in August from EUR2.0bn and EUR2.4bn in June and July respectively, leaving the YoY growth rate flat in nominal terms (see chart above).
Growth in private sector credit (Source: ECB; CMMP)
Private sector credit growth slowed to 2.9% YoY in August from 3.1% YoY in July (see chart above), meaning that the gap between private sector credit and money growth (key signal #3) widened again to 5.0ppt in August from 4.6ppt in July – the money and credit cycles remain out-of-synch with each other (see chart below) creating challenges for policy makers and investors alike.
Growth in PS credit minus growth in broad money (Source: ECB; CMMP)
Household credit grew 4.2% YoY in August and contributed 2.2ppt to the total 2.9% growth (see chart below). Strip out HH lending, however, and private sector credit grew only 0.8% in nominal terms and fell -2.2% in real terms, the slowest rate of real growth since April 2014 (see key chart above).
Drivers of PSC growth by sector (Source: ECB; CMMP)
In short, it’s not just the motorists queueing outside petrol stations today who are facing refuelling challenges – EA investors are too.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
Faster indicators support a “slowing UK momentum” narrative
The key chart
Work-related and delayable card payments versus pre-pandemic levels (Source: ONS; CMMP)
The key message
UK households are delaying spending on so-called “delayable goods” such as clothing and furniture. This matters because this form of spending is a useful indicator of the extent to which the c. £150bn excess savings built up during the pandemic is returning to the UK economy via consumption in a sustained fashion.
Delayable purchases recovered strongly following the re-opening of non-essential stores (12 April) to reach 122% (19 April) and 112% (5 May) of pre-pandemic levels. The latest ONS data release indicates that they fell back to 86% of pre-pandemic levels in the week to 9 September 2021, however (see chart above).
While all forms of credit and debit card spending have recovered from their 2021 lows, only spending on staples and work-related purchases are above pre-pandemic levels (see chart below).
In short, households are spending more in returning to work but the wider message from faster-indicators supports a “slowing UK momentum” narrative.
Credit and debit card payments versus pre-pandemic levels by type (Source: ONS; CMMP)
Please note that the short summary comments and charts above are extracts from more detailed analysis that is available separately
What does the slowdown in UK monetary aggregates mean?
The key chart
Growth (% YoY) in money (M4ex) and lending (M4Lex) over past decade (Source: BoE; CMMP)
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”).
Synchronised UK and EA money cycles (Source: BoE; ECB; CMMP)
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).
M1 as a percentage of EA and UK broad money (Source: BoE; ECB; CMMP)
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.
UK monthly HH money flows (£bn) since January 2019 (Source: BoE; CMMP)
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.
UK and EA money flows as a multiple of pre-COVID levels (Source: BoE; ECB; CMMP)
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.
Monthly flows (%, LHS) and growth rate (% YoY, RHS) in consumer credit (Source: BoE; CMMP)
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).
Annual growth rates in UK and EA consumer credit (Source: BoE; ECB; CMMP)
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).
Lending growth minus money supply growth in the UK and EA (Source: BoE; ECB; CMMP)
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.
Monthly UK retail lending flows (£bn) and breakdown (Source: BoE; CMMP)
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).
UK approvals for house purchases (Source: BoE; CMMP)
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).
Aggregate card spending versus pre-COVID levels (Source: ONS; CMMP)
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.
Recovery and reflation trades require more substantial foundations
The key chart
Growth in M3 (% YoY) and contributions (ppt) from M1 and PSC (Source: ECB; CMMP)
The key message
It is tough to get too excited about the messages coming from the euro area’s (EA) money sector at the start of 3Q21.
Broad money growth is almost 5ppt lower than its January 2021 peak. The positive news here is that households are saving less, indicating that uncertainty levels have fallen. The less positive news is that growth in private sector credit has also fallen to its slowest rate since December 2017. Total lending is growing only 0.8% YoY in real terms and is falling -1.3% YoY in real terms if we exclude lending to HH (mainly mortgages).
In short, while the message from the money sector remains positive for (already overvalued) house prices in the euro area, the wider message is that both a sustained recovery and reflation trades require a more substantial foundation.
The six charts that matter
Growth in EA broad money % YoY (Source: ECB; CMMP)
It is tough to get too excited about the messages coming from the euro area (EA) money sector at the start of 3Q21. Growth in broad money (M3) slowed to 7.6% YoY in July 2021, almost 5ppt below the January 2021 recent high of 12.5% (see chart above). The positive news is that this reflects a reduction in the deflationary forces that drove M3 growth during the pandemic.
YoY growth rates in M3 and M1 since 2001 (Source: ECB; CMMP)
Narrow money (M1) which contributed 7.7ppt to the total 7.6% YoY M3 growth has slowed from 16.5% in January 2021 to 11.0% in July 2021 (see chart above). In short, EA households are saving less.
Monthly flows (EUR bn) of HH deposits during phases of pandemic (Source: ECB; CMMP)
Overnight deposits still account for 6.8ppt of total M3 growth, but in aggregate household monthly deposit flows fell to €23bn in July 2021, below the 2019 average monthly flow of €33bn and the smallest monthly flow since June 2019 (see chart above).
Growth in PSC (% YoY 3m MVA) since 2001 (Source: ECB; CMMP)
The less positive news is that credit demand is also slowing. Private sector credit contributed only 3.5ppt to M3 growth and the YoY growth rate slowed to 2.9% YoY (3MVA) the slowest growth since December 2017 (see chart above).
Trends in growth in lending and contribution from lending x HH (Source: ECB; CMMP)
As noted in “Strip out HH lending”, current lending is predominantly less-productive FIRE-based lending rather than productive COCO-based lending. Total lending grew 0.8% YoY in real terms in July, but fell -1.3% YoY in real terms excluding HH lending (see chart above). HH lending contributed 2.2ppt to the total 3.1% nominal growth in lending in July 2021 (see chart below).
Drivers of PSC growth (Source: ECB; CMMP)
Conclusion
In summary, while the message from the money sector remains positive for (already overvalued) house prices in the euro area, the wider message is that both a sustained recovery and reflation trades require a more substantial foundation.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
…and PSC growth is falling in real terms in the EA
The key chart
Real YoY growth rates in total lending and total minus HH lending (Source: ECB; CMMP)
The key message
Strip out lending to households (mainly mortgages) and private sector lending in the euro area (EA) is falling in real terms. Why does this matter?
A resynchronisation of money and credit cycles in the euro area is one of three key signals indicating a sustained economic recovery for investors and policy makers alike. The ideal scenario would see a reduction in the deflationary forces that drove M3 growth during the pandemic (i.e. HH money holdings) combined with a recovery in productive lending to the private sector. To date, we have witnessed progress in the former but not in the latter.
Monthly flows of HH deposits in April, May and June 2021 were below pre-pandemic levels, for example. Lending to the private sector is slowing too, however, from 4.7% at end 2020 to 3.0% at the end of 1H21. Base effects play a role here as EA corporates borrowed €243bn in the immediate “dash for cash” in March, April and May 2020. For context, net borrowing over the subsequent 12 months to June 2021 totalled only €103bn.
Significantly, total lending minus HH lending (predominantly productive COCO-based lending) contributed only 0.8ppt to the 3.0% YoY lending growth in June 2021. In contrast, HH lending contributed 2.1ppt, the bulk of which is in the form or mortgages.
In other words, current lending is essentially less-productive FIRE-based lending rather than productive COCO-based lending. While this may provide further support for house prices, a sustained recovery requires a more substantial foundation.
The six charts that matter
Growth (% YoY) in broad money and private sector credit (Source: ECB; CMMP)
A resynchronisation of money and credit cycles in the euro area is one of three key signals indicating a sustained economic recovery for investors and policy makers alike.
What drove M3 growth during the pandemic? (Source: ECB; CMMP)
The ideal scenario would see a reduction in the deflationary forces that drove M3 growth during the pandemic (i.e. HH money holdings) combined with a recovery in productive lending to the private sector. To date, we have witnessed progress in the former but not the latter.
Monthly flows (EUR bn) in HH deposits (Source: ECB; CMMP)
To date, we have the former but not the latter. Monthly flows of household deposits in April, May and June 2021 were below pre-pandemic levels. So far, so good.
Nominal YoY growth rates in total lending and total minus HH lending (Source: ECB; CMMP)
Lending to the private sector is slowing too, however, from 4.7% at end 2020 to 3.0% at the end of 1H21.
Monthly flows in NFC borrowing in EUR bn (Source ECB; CMMP)
Base effects play a part here as EA corporates borrowed €243bn in the immediate “dash for cash” in March, April and May 2020. For context, net borrowing over the subsequent 12 month to June 2021 totalled only €103bn.
Drivers of PSC growth by type (Source: ECB; CMMP)
Significantly, total lending minus HH lending (predominantly productive COCO-based lending) contributed only 0.8ppt to the 3.0% YoY lending growth in June 2021. In contrast, HH lending contributed 2.1ppt, the bulk of which is in the form or mortgages.
In other words, current lending is essentially less-productive FIRE-based lending rather than productive COCO-based lending. While this may provide further support for house prices, a sustained recovery requires a more substantial foundation.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
Monthly mortgage flows since January 2019 (Source: ECB; CMMP)
The key message
Monthly mortgage flows suggest that Spain is re-joining the “euro area mortgage party” but this presents mixed messages for investors.
Spain remains the euro area’s (EA) third largest mortgage market despite the fact that the outstanding stock of mortgages (€510bn) is 23% below its December 2010 peak (€665bn). Spain’s market share has fallen from 19% of EA mortgages in December 2008 to 11% in June 2021 and Spanish MFIs have recorded 120 consecutive months of negative contributions to EA mortgage growth since April 2011.
Monthly mortgage flows turned positive in February 2021, however. Annual growth rates turned positive in May 2021 and Spanish MFIs made a positive, albeit small, contribution to total EA growth in June 2021. I highlighted four factors that suggested a more positive demand-side outlook two months ago (see “More consistent than Rapha”). First, the HH debt ratio has fallen back in line with EA averages following a decade of deleveraging. Second, the cost of borrowing is at a record low. Third, the HH debt service ratio is below the LT average and close to its 20-year low. Finally, Spanish house prices are 28% below their peak in real terms with less extreme valuations than elsewhere in the EA.
The latest dynamics present mixed messages for investors. On the bright side, a sustained positive contribution to EA growth represents an important signal for investors positioned for a wider recovery in Europe. Germany and France have been the main drivers of mortgage growth in the recent past, but demand is now widening with Belgium, the Netherlands, Italy, Austria and Spain making larger collective contributions.
That said, these trends also reflect the broader substitution of productive COCO-based lending with less-productive FIRE-based lending in the euro area, which has negative implications for leverage, growth, financial stability and income inequality in the region. Spain has seen the largest shift in percentage points from COCO-based to FIRE-based lending since January 2009 but uniquely this reflects falls in the outstanding stock of both COCO-based (-€488bn) and FIRE-based lending (-€125bn) over the period.
The underlying message here is that mortgage dynamics in the periphery of the EA remain very different from those in the core re-enforcing the message that a “one-size-fits-all” policy response will not suffice.
“Bienvenido de nuevo” in charts
Market share of EA total mortgages (Source: ECB; CMMP)Outstanding stock of Spanish mortgages and market share (Source: ECB; CMMP)Spanish MFIs contribution to EA mortgage growth (Source: ECB; CMMP)Country drivers of EA mortgage growth (Source: ECB; CMMP)Trends in balance between COCO-based and FIRE-based lending (Source: ECB; CMMP)Spanish COCO-based lending (Source: ECB; CMMP)Spanish FIRE-based lending (Source: ECB; CMMP)
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
