Aggregate monthly card payments versus pre-pandemic levels (Source: ONS; CMMP)
Two-thirds of the way through 2Q22, and the message from the UK money sector is still one of resilient consumer spending. But what are households (HHs) spending their money on and why does it matter?
According to the latest ONS data (9 June 2022), monthly spending on credit and debit cards was 104% of its pre-pandemic, February 2020 level. This is 18ppt higher than in January 2022 and 6ppt higher than in May 2021 (see chart above).
All spending categories rose in the week to 1 June according to the shorter-term, daily CHAPS-based indicator. While the overall message from the shorter-data remains the same, it is important to note that spending is concentrated on getting to work and on staples ie, spending more on basic items (see chart below).
Card payments (seven-day rolling average) to 1 June 2020 by type (Source: ONS; CMMP)
In contrast, while spending on delayable goods such as clothing and furniture is recovering, it remains 8ppt below pre-pandemic levels.
This matters, because spending on delayables is a key indicator of whether the excess savings built up during the pandemic are returning to the economy in a sustained manner.
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
Monthly credit and debit card payments in relation to pre-pandemic levels (Source: ONS)
The key message
The latest ONS “real-time” indicators (12 May 2022) confirm the resilience of the UK consumer during 2Q22.
Monthly card spending in April was 2% above pre-pandemic levels, 16ppt higher than in January 2022. Daily card spending rose to 110% pre-pandemic levels in the week to 5 May 2022, with rises across all segments. Spending on so-called “delayable” goods continues to recover but is the only segment where current spending is still below pre-pandemic levels. This matters because spending on delayable goods is the best indicator that the excess savings built up during the pandemic are returning to consumption in a sustainable fashion.
Despite the threat of rising inflation and falling real incomes, UK consumers continue to “bash the plastic”. They are spending more on getting to work and on staples, however, than on items such as clothing and furniture. So positive news, but only up to a point.
A full recovery in spending on delayable goods is required before we can have confidence that the UK consumption recovery is sustainable.
Still bashing the plastic – the charts that matter
The latest ONS “real-time indicators” (12 May 2022) confirm the resilience of the UK consumer through 2Q22, at least so far. Monthly card spending (see chart above) in April was 102% pre-pandemic levels, 16ppt higher than in January 2022 (87%) and 9ppt higher than April 2021 (93%).
Daily aggregate card spending in relation to pre-pandemic levels (Source: ONS)
Daily card spending (rolling seven-day) also increased by 8ppt in the week to 5 May 2022 to reach 110% of pre-pandemic levels (see chart above). Spending rose across all categories, with the largest growth seen in “social” spending. “Work-related”, “staple” and “social spending” are currentl 131%, 120% and 113% pre-pandemic levels (see chart below).
Current card spending by type versus pre-pandemic levels (Source: ONS)
Spending on “delayable” goods such as clothing and furniture is recovering (see chart below), but remains 5% below pre-pandemic levels. This matters because delayable spending is our preferred indicator regarding the extent to which excess savings are returning to the economy in a sustained fashion.
Card spending on delayable goods versus pre-pandemic levels (Source: ONS)
Conclusion
UK consumers continue to “bash the plastic” despite the challenges of rising inflation and falling real incomes. This is positive news. Consumers are spending more on getting to work and on staples, however, than on items such as clothing and furniture. A full recovery in spending on delayable goods is required before we can have confidence that current consumption is sustainable.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
Created challenges for policy makers, banks and investors alike
The key chart
Lending growth (% YoY) minus money growth for the UK and EA since 2012 (Source: BoE; ECB)
The key message
Money and credit cycles have been desynchronised for much of the past decade, creating major challenges for policy makers, banks and investors alike.
Growth in money supply has also exceeded growth in private sector credit in the euro area and for much of the period in the UK. The effectiveness of monetary policy, the dominant macro policy, has diminished dramatically as a result.
The gap between growth in money supply and private sector credit hit a historic high during the COVID-19 pandemic. More recently, however, these growth rates have converged as the build-up of excess savings has slowed and the demand for credit has recovered (at least in nominal terms).
This means that three key signals from the UK and EA money sectors have turned more positive: monthly HH money flows have fallen back below pre-pandemic levels; quarterly consumer credit flows have been positive since 2Q21 and have returned to pre-pandemic levels in the UK; and the gap between money supply and private sector credit growth has narrowed.
Macro challenges remain, but the message from the UK and EA money sectors is less bearish than consensus investment narratives.
A desynchronised decade
Growth rates (% YoY) in EA money and lending (Source: ECB)Growth rates (% YoY) in UK money and lending (Source: BoE)
Money and credit cycles have been desynchronised for much of the past decade. In typical cycles, monetary aggregates and their key counterparties, such as private sector credit, move together. Put simply, money supply indicates how much money is available for use by the private sector. Private sector credit indicates how much the private sector is borrowing. However, the two charts above show the extent to which, and the periods when, UK and EA money and credit cycles have diverged since March 2012.
EA money flow minus credit flow (rolling quarters) since Mar 2012 (Source: ECB)
Growth in money supply has also exceeded growth in private sector credit in the euro area and for much of the period in the UK. The charts above (EA) and below (UK) illustrate trends in the gap between money and credit flows (rolling quarters) for both regions. The build-up of liquidity in both regions is clear to see. Increases in the supply of money have not been matched by equivalent increases in private sector demand for credit.
UK money flow minus credit flow (rolling quarters) since Mar 2012 (Source: BoE)
The effectiveness of monetary policy, the dominant macro policy, has diminished dramatically as a result. Broadly speaking, monetary policy is effective if “central bank accommodation increase money and credit for the private sector to use” (Koo, 2015). Not only has credit growth lagged money supply growth, it has also been predominantly the “wrong type of credit” ie, less productive FIRE-based lending. As noted in previous posts, this has hidden risks in terms of leverage, future growth, financial stability and income inequality.
Loan growth (% YoY) minus money growth (Source: BoE; ECB)
The gaps between growth in money supply and private sector credit hit historic highs during the COVID-19 pandemic (see chart above). In the UK, loan growth exceeded money growth between August 2018 and December 2019. During the pandemic, however, the gap between money growth (15.4%) and credit growth (3.9%) widened to 11.5ppt in February 2021. In the EA, money growth (4.9%) exceeded credit growth (3.7%) by 1.2ppt at the end of 2019. The gap peaked at 8ppt in January 2021 – money growth of 12.5% versus credit growth of 4.5%.
More recent YoY growth trends in UK and EA money and lending (Source: BoE; ECB)
More recently, these growth rates have converged as the build-up of excess savings has slowed and credit demand has recovered (at least in nominal terms). At the end of 1Q22, money growth had slowed to 5.5% YoY in the UK while credit growth had risen to 3.7% YoY, a narrowing of the gap to only 1.8ppt. Similarly, in the EA, money growth at the end of 1Q22 had slowed to 6.3% YoY while credit growth was 4.7% YoY, a gap of 1.6ppt (see chart above).
Conclusion
What does this mean? Three key signals from the UK and EA money sectors have turned more positive: monthly HH money flows have fallen back below pre-pandemic levels; quarterly consumer credit flows have been positive since 2Q21 and have returned to pre-pandemic levels in the UK; and the gap between money supply and private sector credit growth has narrowed.
Macro challenges remain, but the message from the UK and EA money sectors is less bearish than consensus investment narratives.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
We might expect HHs to repay consumer credit again
The key chart
Quarterly flows in UK (£bn) and EA (EURbn) consumer credit (Source: BoE, ECB)
The key message
If confidence is collapsing, we might reasonably expect households to be repaying consumer credit again. Are they…?
During the COVID-19 pandemic, households (HHs) in the UK and the euro area (EA) repaid consumer credit in four of the five quarters between 1Q20 and 1Q21 (see key chart above). The message from the money sector over this period was that HHs were increasing savings and delaying consumption.
Quarterly consumer credit flows have been positive since 2Q21, however, and have returned to pre-pandemic levels in the UK in 1Q22. Year-on-year growth rates have also recovered to their highest levels since February 2020 and March 2020 in the UK and the EA respectively. Before we get too excited, it is important to note that growth in consumer credit is negative in real terms (and EA HHs repaid €0.4bn of consumer credit in March 2022). So-called “faster indicators” also indicate that HHs in the UK are still delaying their spending on “delayable” good such as clothing and furniture indicating that the sustainability of consumption remains unproven still.
In short, the trends in two of the three key signals from the money sector remain positive, (if not that exciting). HHs in the UK and the EA have stopped hoarding cash and demand for consumer credit has remained positive. The recovery in the UK appears more advanced than in the EA, although current UK spending is concentrated towards work-related and staple items rather than delayable items.
The key message here is that while HH consumption patterns remain relatively subdued they are inconsistent with more extreme investment narratives.
Messages from the money sector were less optimistic than consensus investment narratives in 2H21 and less pessimistic than the current investment narrative now.
A positive for a macro-strategist currently “long cash”?
If confidence is collapsing – part 2
If confidence is collapsing, we might reasonably expect HH to be repaying consumer credit again. During the COVID-19 pandemic, HHs in the UK and the EA repaid consumer credit in four of the five quarters between 1Q20 and 1Q21 (see key chart above). Between 1Q18 and 4Q19, quarterly consumer credit flows averaged £3.6bn and €10.3bn in the UK and EA respectively. At the height of the pandemic (2Q20), UK and EA households repaid £13.2bn and €12.9bn respectively. The message from the money sector over this period was that HHs were increasing savings and delaying consumption.
Quarterly flows in UK (£bn) and EA (EURbn) consumer credit (Source: BoE, ECB)
Quarterly consumer credit flows have been positive since 2Q21, however, and have returned to pre-pandemic levels in the UK in 1Q22 (see chart above). UK consumer credit flows totalled £3.6bn in 1Q22, up from £3.3bn in 4Q21 and exactly in line with the average pre-pandemic quarterly flows. EA consumer credit flows totalled €4.4bn, down from €6.5bn in 4Q21. In contrast to the UK, current EA flows remain well below the pre-pandemic average flows of €10.3bn and EA HHs repaid €0.4bn of consumer credit in March 2022. Recall that in lesson #5 in “Seven lessons from the money sector in 2020”, I argued that,
“the UK is likely to demonstrate a higher gearing to a return to normality than the EA.”
YoY growth rates in consumer credit in the UK and EA (Source: BoE; ECB)
Year-on-year growth rates have also recovered to their highest levels since February 2020 and March 2020 in the UK and the EA respectively. In March 2022, UK and EA consumer credit grew 5.2% YoY and 2.5% YoY respectively (see chart above). Note again the relatively high gearing of the UK to a recovery in consumer credit demand. Before we get too excited, however, it is important to note that YoY growth in consumer credit is negative in real terms in both regions.
Credit and debit card payments on durable goods compared with pre-pandemic levels (Source: ONS)
So-called “faster indicators” also indicate that HHs in the UK are still delaying their spending on “delayable” good such as clothing and furniture indicating that the sustainability of consumption remains unproven still. According to the latest ONS data, credit and debit card spending remains 12% below its pre-pandemic level and 51% below its 2021 high (see graph above). This makes delayable spending the weakest segment in current UK spending (see graph below). Overall card spending is just above pre-pandemic highs, reflecting relatively strong “work-related” and “staples” spending. The latter two segments are 24% and 13% above pre-pandemic levels respectively.
Credit and debit card spending versus pre-pandemic levels broken down by type (Source: ONS)
Conclusion
In short, the trends in two of the three key signals from the money sector remain positive, (if not that exciting). HHs in the UK and the EA have stopped hoarding cash and demand for consumer credit has remained positive. The recovery in the UK appears more advanced than in the EA, although current UK spending is concentrated towards work-related and staple items rather than delayable items.
The key message here is that while HH consumption patterns remain relatively subdued they are inconsistent with the more extreme investment narratives that have gained popularity recently. Messages from the money sector were less optimistic than consensus investment narratives in 2H21 and less pessimistic than the current investment narrative now. A positive for a macro-strategist currently “long cash”?
Please note that the summary comments and charts above are extracts from more detailed research that is available separately.
Why have HH money flows fallen back below pre-pandemic levels?
The key chart
Monthly HH deposit flows as a multiple of average pre-pandemic levels. (Source: BoE; ECB)
The key message
If confidence is collapsing, why have household (HH) money flows in the UK and the euro area (EA) fallen back below pre-pandemic levels?
During the COVID-19 pandemic, HHs increased their holdings of liquid assets such as overnight deposits, despite earning negative real returns on those assets. In other words, the expansion of broad money over the period was a reflection of deflationary rather than inflationary forces, challenging the monetarist explanation for the current rise in inflation.
In both the UK and EA, monthly HH money flows have fallen back below pre-pandemic levels during 1Q22. These trends support the argument that forced savings, rather than precautionary savings, were the main driver of the spike in HH savings during the pandemic. This is important because forced savings can be released relatively quickly to support economic activity. Nonetheless, it would also be reasonable to assume that the level of precautionary savings would still be above pre-pandemic levels given the uncertainties caused by the Ukraine war, rising inflation and cost-of-living pressures. So far, at least, this does not seem to be the case…
…is the consensus narrative in relation to consumer confidence becoming too bearish?
If confidence is collapsing
If confidence is collapsing, why have household (HH) money flows in the UK and the euro area (EA) fallen back below pre-pandemic levels? Recall that these flows offer important insights into HH behaviour and were one of three key signals that CMMP analysis focused on throughout 2021 in order to interpret macro trends more effectively. The other signals were trends in consumer credit demand (growth outlook) and the synchronisation of money and credit cycles (policy context). I will turn to these signals in subsequent posts.
During the COVID-19 pandemic, HHs increased their holdings of liquid assets such as overnight deposits despite earning negative real returns (see key chart above). In the UK, monthly money flows peaked at £27bn in May 2020 and again at £21bn in December 2020, 5.8x and 4.5x average pre-pandemic levels of £4.6bn respectively. In the EA, monthly HH deposit flows peaked at €78bn in April 2020, 2.4x the average pre-pandemic level.
Narrow money (M1) as a %age of broad money (M3) (Source: BoE; ECB)
This meant that the expansion of broad money over the period was a reflection of deflationary rather than inflationary forces. Narrow money (M1), which comprises notes and coins in circulation and overnight deposits, has been increasingly important component/driver of broad money. In March 2022, M1 represented 68% and 73% of M3 in the UK and EA respectively (see chart above). This compares with respective shares of only 46% and 49% in March 2009. This matters for the simple reason that it challenges the monetarist explanation of rising inflation.
Money sitting idly in overnight deposits with banks contributes to neither growth nor inflation.
UK monthly HH money flows (£bn) and multiple of pre-pandemic level (x) (Source: BoE)
In both the UK and EA, monthly HH money flows have fallen back below pre-pandemic levels during 1Q22. In the UK, monthly flows in February and March 2022 were £4.1bn and £4.6bn respectively (see chart above). These compare with the average pre-pandemic flow of £4.7bn. In the EA, March 2022’s monthly flow of €16bn, was half the average pre-pandemic flow of €33bn (see chart below).
EA monthly HH money flows (EURObn) and multiple of pre-pandemic level (x) (Source: BoE)
These trends support the argument that forced savings, rather than precautionary savings, were the main driver of the spike in HH savings during the pandemic. This is important because forced savings can be released relatively quickly to support economic activity. Nonetheless, it would also be reasonable to assume that the level of precautionary savings would still be above pre-pandemic levels given the uncertainties caused by the Ukraine war, rising inflation and cost-of-living pressures.
So far, at least, this does not seem to be the case…is the consensus narrative too bearish?
Please note that the summary comments above are extracts from more detailed analysis that is available separately.
UK aggregate and delayable goods card payments in relation to pre-pandemic levels (Source: ONS; CMMP)
The key message
UK households (HHs) are delaying their spending on so-called “delayable” goods such as clothing and furniture. This matters for two reasons:
First, spending on delayable goods is our preferred proxy for the return of the excess savings built up during the pandemic to productive use;
Second, a key assumption in the latest OBR forecasts for the UK economy and public finances is that HHs will run down their excess savings (and increase their borrowing) to fuel consumption in the face of declining real wages.
The message from the money sector so far this year is that UK aggregate spending is recovering steadily but the sustainability of consumption remains unproven. HHs are spending more on getting to work, for example, but less on buying clothes, furniture and other durable goods.
In short, the accumulation of excess savings may have slowed but we await further evidence that these savings are being run down to support sustained consumption as the OBR expects.
Delaying the delayable in charts
Delayable goods payments in relation to pre-pandemic levels (Source: ONS; CMMP)
UK households (HHs) are delaying their spending on so-called “delayable” goods such as clothing and furniture. According to the latest ONS real-time indicators, credit and debit card purchases on delayable goods in the week to 17 March 2022 were 82% of their February 2020 average (see chart above). This means that delayable spending is currently the weakest segment of HH spending. Spending on work-related, staples, and social goods and services are currently 17%, 9% and 5% above pre-pandemic levels (see chart below).
UK card spending in relation to pre-pandemic levels (ppt) broken down by type (Source: ONS; CMMP)
This matters for two reasons. First, spending on delayable goods is our preferred proxy for the return of the excess savings built up during the pandemic to productive use. Second, and related to this, a key assumption in the latest OBR forecasts for the UK economy and public finances is that HHs will run down their excess savings (and increase their borrowing) to fuel consumption in the face of declining real wages (see “Good news for Rishi, but…”).
Aggregate UK card spending in relation to pre-pandemic levels (Source: ONS; CMMP)
The message from the money sector so far this year is that UK aggregate spending is recovering steadily (see chart above) but the sustainability of consumption remains unproven. HHs are spending more on getting to work, for example, but less on buying clothes, furniture and other durable goods (see chart below).
Delayable versus work-related card spending in relation to pre-pandemic levels (Source: ONS; CMMP)
In short, UK HH’s accumulation of excess savings may have slowed but we await further evidence that these savings are being run down to support sustained consumption as the OBR expects.
Please nore that the summary comments and charts above are extracts from more detailed analysis that is available separately.
Trends and forecasts for public sector net borrowing as % GDP (Source: OBR; CMMP)
The key message
In its “Economic and fiscal outlook”, the Office of Budget Responsibility (OBR) delivered mixed messages for the UK economy and public finances.
The headlines are likely to focus on the forecast that the government’s borrowing will narrow to -1.1% GDP by 1Q27. This would be the lowest budget deficit for 25 years (£32bn) and music to the ears for a Chancellor who believes in his moral responsibility to balance the budget.
The forecasts assume (1) dramatic role reversals in the position of the UK government vis-à-vis the household (HH) sector and (2) sustained and significant current account deficits throughout the forecast period. They also present a more subdued outlook for business investment.
The key risks lie in the assumption that, in the face of falling real incomes, HHs will maintain consumption via reducing their savings ratio to a record low and/or increasing borrowing further (despite high HH debt ratios).
Beyond these risks, there are two further problems with these latest OBR forecasts:
First, the assumed end-position envisages BOTH domestic sector sectors running persistent net deficits beyond 4Q22, leaving the UK reliant on the RoW as a net lender. Such a scenario appears neither attractive nor sustainable;
Second, and more fundamentally, the implied shift away from public debt to private debt reflects the persistent flaw in conventional macro thinking that typically ignores the risk associates with private debt while seeing public debt as a problem rather than a solution.
Faced with these two problems, I believe that the greatest value in these forecasts lies in the insights they provide into the key drivers and assumptions that lie behind current policy and thinking. From there, we can all form our own views as to the likelihood of them being achieved in reality…
Good news for Rishi, but…
Trends and forecasts for public sector net borrowing as % GDP (Source: OBR; CMMP)
The OBR provided good news for Rishi Sunak, the UK Chancellor, in its latest “Economic and fiscal outlook” published on Wednesday 23 March 2022.
The UK government’s net borrowing position has already narrowed to -10.1% GDP (3Q21) versus previous expectations of -11.4%. More significantly, the OBR expects this to narrow to -1.1% by 1Q27 compared with previous forecasts of -1.5% (see chart above). This would represent the lowest budget deficit for 25 years (£31.6bn). Music to the ears for a Chancellor who believes in a moral responsibility to balance the budget.
Key OBR assumptions
Trends and forecasts for HH net borrowing as % GDP (Source: OBR; CMMP)
The key assumption behind the OBR’s forecasts is that the HH sector moves from its traditional role as a net lender to the rest of the economy to being a sustained net borrower (see chart above).
Such a transition would involve remarkable role reversals from a period when the “Government took exceptional measures to protect HH incomes from the full effect of one crisis (the pandemic) to one in which imported cost rises force HHs to save less to cushion the blow to real spending” (OBR, March 2022).
In short, to move to a net lender position, HHs would need to either reduce their savings and/or increase their borrowings.
Trends and forecasts for HH savings ratio (Source: OBR; CMMP)
The OBR forecasts a more dramatic reduction in the HH savings ratio than previously, to a record low of 2.8% by the start of 2023 (see chart above). This would allow HHs to maintain their consumption levels in the face of the expected fall in real incomes.
To support this assumption, the OBR notes that HHs have, “saved around £230bn more than in the equivalent period before the pandemic, of which around £185 billion is held in highly liquid deposits.” This is true but much of these excess savings have accrued to HHs that already have sizable savings, have higher incomes, and are much older. Such HHs typically spend less from an extra savings they accumulate.
With the OBR also forecasting that the savings ratio will remain at around 5% through their forecast period, below the LT average of around 8%, the risks to this assumption lie to the downside, in my view.
UK household debt ratio (% GDP) (Source: BIS; CMMP)
The OBR argues that, “in practice the lower savings ratio will reflect some HHs running down excess savings while other take on more debt.” In that context, it is worth noting that the HH debt ratio has fallen from its peak of 97% GDP in 1Q10 to 88% GDP at the end of 3Q21. Nonetheless, it remains above the BIS maximum threshold level, above which debt becomes a drag in future growth (see chart above).
While the cost of servicing debt remains very low, the overall debt ratio suggests that HHs may be reluctant to increases borrowing levels dramatically from current levels.
Trends and forecasts for NFC net borrowing as % GDP (Source: OBR; CMMP)
In another example of assumed role reversals, the OBR expects the NFC sector to remain a net lender until 2Q25 (see chart above). Note that NFC sectors are typically net borrowers while HH sectors are typically net lenders.
The OBR notes that, “since the start of the pandemic, business investment has been weak and recovered more slowly than other elements of expenditure.” In the 4Q21, business investment remained over 10% below its pre-pandemic peak and almost 3% below the OBR’s previous forecast. In its downward revision, the OBR expects, “investment not to recover to its pre-pandemic peak until the end of 2022 – nearly a year later than GDP as a whole”.
Trends and forecasts for RoW net borrowing as % GDP (Source: OBR; CMMP)
With both UK domestic sectors forecast to run simultaneous net deficits, the OBR assumes (by definition) that the ROW’s net surplus (ie, the UK’s current account deficit) will remain significant and of a similar size to the years before the pandemic. In other words, the UK will remain reliant on the RoW as a net lender. No change from previous forecasts there.
Conclusion
OBR forecasts from a sector balances perspective (Source: OBR; CMMP)
The OBR’s forecast that the UK’s budget deficit will fall to just over 1% GDP (£32bn) in 2026-27 will be welcome news for Rishi Sunak. This would represent the smallest budget deficit (£32bn) for 25 years.
Viewed from a sector balances perspective, these forecasts assume dramatic role reversals in the position of the UK government vis-à-vis the HH sector (and to lesser extent between the HH and NFC sectors) and sustained and significant current account deficits. The key risks to these forecasts lie in the assumption that, in the face of falling real incomes, HH will maintain consumption via reducing their savings ratio to a record low and/or by increasing their borrowing further (despite HH debt ratios).
Beyond the risks to key assumptions, there are two further problems with the OBR forecasts.
First, the assumed end-game envisages BOTH domestic sector running net deficits from 4Q22 onwards leaving the UK increasing reliant on the RoW as a net lender. Such a scenario appears neither attractive nor sustainable (see chart above).
Second, and more fundamentally, the implied shift to replace public borrowing with more private borrowing reflects the flaw in conventional macro thinking that typically ignores the risks associated with private debt while seeing government debt as a problem rather than as a solution.
Faced with these two problems, I believe that the greatest value in these forecasts lies in the insights they provide into the key drivers and assumptions that lie behind current policy and thinking. From there, we can all form our own views as to the likelihood of them being achieved in reality…
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
The previous OBR forecasts viewed from a sector balances perspective (Source: OBR; CMMP)
The key message
The Office of Budget Responsibility (OBR) will publish its latest “Economic and fiscal outlook” tomorrow (Wednesday 23 March 2022) following the Chancellor’s Spring Statement in Parliament.
The outlook will present the OBR’s latest forecasts for the economy and public finances. The context remains one in which the Chancellor, Rishi Sunak, has pledged to restore order to the government finances after borrowing increased during the pandemic.
“The ongoing uncertainty caused by global shocks means it’s more important than ever to take a responsible approach to the public finances.”
Rishi Sunak quoted by Bloomberg (22 March 2022)
There are three key things to bear in mind when analysing these latest forecasts tomorrow:
Second, responsible fiscal outcomes are those that deliver a balanced economy not a balanced budget (see “Note to Rishi“)
Third, previous OBR forecasts for improvements in UK government finances (see key chart above) relied on unsustainable assumptions including sustained, twin domestic deficits counterbalanced by significant and persistent current account deficits (see “A return to abnormality“)
Rather than sending a message of fiscal responsibility, such assumptions smell more of “reverse engineering.” As always, one chart among the 200+ pages, will tell us all we need to know tomorrow…
The recovery story in UK consumption remains steady rather than dramatic
The key chart
Aggregate UK card payments in relation to pre-pandemic levels (Source: ONS; CMMP)
The key message
Strip out seasonal effects and the “steady recovery” story for UK consumption remains on track.
The behaviour of UK households (HH) reached an important inflexion point in early 4Q21. The year also ended with monthly HH deposit flows, a useful proxy for uncertainty levels, falling to 0.6x pre-pandemic levels and improving monthly and quarterly consumer credit trends. Positive news.
So-called “faster indicators” for estimating credit and debit card payments indicate weakness in spending at the start of the 2022. The ONS suggests that these trends were consistent with seasonal effects, however. Spending has recovered more recently with “aggregate” and “social” payments slightly below pre-pandemic levels and “staples” and “work-related” payments both above.
Payments on durable items, such as clothing and furniture, remain below pre-pandemic levels. This matters because payments on these items represent the best proxy for a more sustained recovery in UK consumption and a return of some of the c£162bn excess savings built up during the pandemic to more productive use.
In short, the message from the money sector is one of a steady rather than a dramatic recover in UK consumption so far…
Steady as she goes II – six charts that matter
Monthly HH money flows (£bn) since January 2019 (Source: BoE; CMMP)
In early December 2021, I argued that the behaviour of UK HHs had reached a potentially important inflexion point at the start off the 4Q21. Monthly money flows (a proxy for HH uncertainty) had moderated sharply (see chart above) and monthly consumer credit flows had reached new YTD highs. I also warned, however, that the emergence of the omicron variant and renewed restrictions might result in “these points being missed, or worse still, reversed”.
The year actually ended on a relatively positive note. Monthly HH deposit flows dropped to £2.7bn, 0.6x their pre-pandemic levels (see first chart in this section above). Monthly consumer credit flows remained at c£1bn in the last three months of 2021 (see chart above), delivering the largest quarterly flows since the pandemic hit the UK economy (see chart below). Of course, the YoY growth rate in consumer credit of 1.4% YoY remains relatively modest in relation to past trends and negative in real terms.
Quarterly flows in UK consumer credit (£bn) (Source: BoE; CMMP)
So-called “faster-indicators” for estimating UK spending on credit and debit cards point to volatility/weakness in consumer spending at the start of 2022.
Aggregate card spending in relation to pre-pandemic levels (Source: ONS; CMMP)
Aggregate card payments fell from 130% of their pre-pandemic levels on Christmas Eve 2021 to 75% on the 4th January 2022. Since then they have recovered steadily to 96% of their pre-pandemic levels by 3rd February 2022 (see chart above). The ONS suggests that observed trends are consistent with seasonal effects.
Card spending in relation to pre-pandemic levels broken down by type (Source: ONS; CMMP)
“Aggregate” and “social” payments have recovered, but remain slightly below pre-pandemic levels as of early February 2022. “Staples” and “work-related” payments have recovered the most and are both above their respective pre-pandemic levels (see chart above). The chart illustates the difference between current payments and average payment levels in February 2020 in percentage points.
Aggregate payments and payments on durable goods in relation to pre-pandemic levels (Source: ONS; CMMP)
Payments on durable items, such as clothing and furniture, remain below pre-pandemic levels (see chart above). This matters because payments on these items represent the best proxy for a more sustained recovery in UK consumption and a return of some of the c£162bn excess savings built up during the pandemic to more productive use.
Conclusion
In short, the message from the money sector is one of a steady rather than a dramatic recover in UK consumption so far…
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
UK and euro area (EA) money sectors have sent remarkably consistent messages throughout the COVID-pandemic. Shared trends in monetary aggregates, for example, provided similar conclusions regarding household (HH) behaviour, consumption and growth, the challenges facing policy makers, and the productivity of lending to the private sector (PSC).
The 4Q21 proved to be an important inflexion point in terms of HH confidence and behaviour in both regions. By December 2021, monthly deposit flows had moderated to 0.6x and 0.7x their pre-pandemic levels in the UK and EA respectively, leaving excess savings of c£162bn and c€285bn in the form of bank deposits. Demand for consumer credit recovered to 1.4% YoY and 1.2% YoY in the UK and EA respectively, and quarterly flows were positive in each of the past three quarters. So far, so good.
In addition to rising inflation, the Bank of England and the ECB both face on-going challenges in terms of the persistent desychronisation of money and credit cycles, which limits monetary policy effectiveness, and the fact that policy responses to date have fuelled growth in the wrong type of credit. The gap between the growth in money supply (ST liabilities of banks) and growth in PSC (key assets of banks) has narrowed but remains wide by historic standards. Nonetheless, the build-up of excess liquidity in both regions is slowing. Mortgage lending, the largest element of so-called “FIRE-based” lending, continues to be the main driver of PSC in the UK and the EA. This has potentially negative implications for growth, leverage, income inequality and financial stability.
In short, the money sectors in the UK and EA continue to sing from the same song sheet. The message for corporates, policy makers and investors alike is that an important inflexion point was reached in terms of HH confidence and behaviour in 4Q21. This is welcome news.
Of course, policy challenges remain and a slowdown in excess liquidity and/or a diversion into productive COCO-based lending rather than less productive FIRE-based lending may be less welcome news for financial assets in 2022.
The money sectors in the UK and the euro area (EA) have sent remarkably consistent messages throughout the COVID-19 pandemic. We know that narrow money (M1), and overnight deposits within M1, drove the expansion of broad money (M4ex, M3 respectively) in both regions during 2020, for example. In other words, the rise in broad money illustrated in the chart above was a reflection of the deflationary forces of increased savings and delayed consumption.
We also know that, as at the end of December 2021, M1 represented 68% and 73% of M3 in the UK and the EA, up from 48% and 51% respectively a decade earlier (see chart below). Preference for highly liquid assets remains high, despite the negative real returns earned from those assets.
Narrow money as a share of broad money since December 2011 (Source: BoE; ECB; CMMP)
A sustained recovery in both regions required/requires a reversal of these deflationary trends ie, a moderation in monthly HH deposit flows and a recovery in consumer credit (see “Three key charts for 2021”). Central banks also need to see a resynching of money and credit cycles. Why? Because, monetary policy effectiveness is based on certain stable relationships between monetary aggregates.
Monthly HH deposit flows as a multiple (x) of pre-pandemic levels (Source: BoE; ECB; CMMP)
As noted in “Missing the point?” in December 2021, HH behaviour reached a potentially important inflexion point at the start of the 4Q21. Monthly deposit flows (see chart above) peaked at 5.9x pre-pandemic levels in the UK in May 2020 and 2.4x pre-pandemic levels in the EA in April 2020. In December 2021, these flows had moderated to 0.6x and 0.7x pre-pandemic levels respectively. During this process HHs have accumulated excess savings in the form of bank deposits of £162bn in the UK and €285bn in the EA (CMMP estimates).
Annual growth rates in consumer credit reached a low point in February 2021 in both the UK (-10% YoY) and the EA (-3% YoY). In December 2021, however, annual growth rates had recovered to 1.4% YoY and 1.2% YoY respectively in the UK and EA respectively (see chart above). More importantly perhaps, quarterly flows of consumer credit have been positive and rising for the past three quarters (see chart below). The 4Q21 flows of £3bn and €4bn in the UK and EA respectively remain below pre-pandemic levels, however, especially in the EA where quarterly flows averaged €10bn during 2018-2019.
Quarterly flows in consumer credit (£bn, EURO bn) (Source: BoE; ECB; CMMP)
The COVID-19 pandemic exacerbated the desynchronisation of money and credit cycles in the UK and EA creating major challenges for policy makers, banks and investors alike. The degree of this desynchronisation peaked in early 2021 and reached its narrowest level since early 2020 in December 2021 (see chart below). That said, the gap between the growth rates of money supply (short-term liabilities of banks) and private sector lending (the main asset of banks) persists and remains high in a historic context.
Growth in lending (% YoY) minus growth in money supply (% YoY) (Source: BoE; ECB; CMMP)
Mortgage lending, the largest element of so-called “FIRE-based lending”, continues to be the main driver of PSC growth in both regions (see chart below). In December 2021, mortgage lending grew 5.1% YoY in the UK and 5.4% YoY in the EA. Lending to NFCs, the largest element of more productive “COCO-based lending”, rose 4.2% YoY in the EA but fell -0.4% YoY in the UK. As described above, consumer credit, another form of COCO-based lending grew 1.4% YoY and 1.2% YoY in the UK and EA respectively.
Breakdown on PSC growth by type of lending (% YoY) (Source: BoE; ECB; CMMP)
Conclusion
The money sectors in the UK and EA continue to sing from the same song sheet. The message for corporates, policy makers and investors alike is that an important inflexion point was reached in terms of HH confidence and behaviour in 4Q21. This is welcome news. Of course, policy challenges remain and a slowdown in excess liquidity and/or a diversion into productive COCO-based lending rather than less productive FIRE-based lending may be less welcome news for financial assets in 2022.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
