UK – Page 8 – Chris Mallin Macro Perspectives

“Rolling over?”

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.

“Where next for UK consumption?”

Expect a steady release of the £150bn of excess savings

The key chart

**Aggregate card payments versus pre-COVID levels** (Source: ONS; CMMP)

The key message

UK GDP grew 4.8% YoY in 2Q21 as consumer spending rebounded following the easing of COVID-19 restrictions during the quarter. The message from the money sector, which has foreshadowed official data well, remains positive but with the risk of momentum slowing. The £150bn of “excess savings” are likely to return to consumption in a steady rather than dramatic fashion.

Spending on credit and debit cards, which has been rising since early January, accelerated further with the re-opening of non-essential retail stores on 12 April 2021. In relation to pre-COVID levels, the largest increases in spending since the latest relaxation have been on the “work-related” (31ppt) and “delayable” (30ppt) goods. In contrast, spending on “staples” has slowed (but remains above pre-COVID levels).

Spending has increased further so far in the 3Q21: social (11ppt); work-related (6ppt); delayable (2ppt) and staples (1ppt). However, it is below recent peaks in each category and below (delayable, social) or at (aggregate) pre-COVID levels.

Separately, the money sector is indicating that household uncertainty remains elevated as indicated by monthly flows of money holdings that remain 2x pre-COVID levels. On a positive note, this suggests that excess savings built up during the pandemic now exceed £150bn.

Spending on delayables is the best indicator of the extent to which excess savings are returning to the economy via sustained consumption. The evidence to date is that this is happening in a steady rather than dramatic fashion.

Where next – in charts

**Change in card spending (ppt) since 12 April relaxation versus pre-COVID levels** (Source: ONS; CMMP)

**Spending trends so far in 3Q21 (to 5 August) versus pre-COVID levels** (Source: ONS; CMMP)

**Monthly flows (£bn) of HH money holdings since January 2009** (Source: BoE; CMMP)

**CMMP estimates of build up of excess savings during the pandemic** (Source: BoE, CMMP)

**Trends on aggregate spending and spending on delayable goods versus pre-COVID levels** (Source: ONS; CMMP)

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.

“Euro area leads the UK”

Money cycles remain synchronised, but the EA is leading the transition to normality

The key chart

**Trends in UK and EA broad money aggregates** (Source: BoE; ECB, CMMP)

The key message

The UK and EA money cycles remain highly synchronised but the UK is lagging the EA in terms of the phased, steady return to normality.

Narrow money drove the expansion of broad money in both cases during the pandemic, reflecting the DEFLATIONARY forces of heightened uncertainty, increased savings, reduced consumption and relatively subdued demand for credit.

Among the key signals indicating a return to normality are (1) a moderation in household deposit flows, (2) a recovery in consumer credit, and (3) a resynching of money and credit cycles.

Monthly HH deposit flows/uncertainty levels have peaked in the UK and the EA, but while June 2021’s monthly flows in the EA were slightly below pre-pandemic levels, UK flows (£10bn) remained double the pre-pandemic average. According to CMMP estimates, excess HH savings in the UK have now reached over £150bn at the end of 1H21 (below official forecasts of £160bn).

Monthly consumer credit flows have turned positive in both the UK and the EA. However, while YoY growth rates turned positive in April in the EA they remain negative (-2.2%) in the UK.

The desynchronization of money and credit cycles during the pandemic has created challenges for policy makers and bankers alike. The growth in the supply of money exceeded the growth in private sector credit by record amounts during Phase 2 of the pandemic. The gap between them peaked at 11ppt in the UK (February 2021) and 8ppt in the EA (January 2021). At the end of the 2Q21, the gaps remained at 6.4ppt in the UK and 5.3ppt in the EA. Narrower than before but still very wide in a historic context.

In previous posts, I cautioned about confusing the messages from the money sector and suggested that reflation trades needed refuelling. As we enter 2H21, it remains important to understand the messages from the money sector correctly.

Falling growth rates in broad money reflect a moderation in deflationary forces primarily. Both the UK and EA are transitioning towards a steady recovery phase albeit at a different pace. The level of HH excess savings in the UK suggests a higher gearing towards a recover in HH consumption but, to date, the EA is leading the transition.

EA leads the UK – in charts

**Trends in monthly HH deposit flows since January 2019** (Source: BoE; ECB; CMMP)

Monthly HH deposit flows/uncertainty levels have peaked in the UK and the EA, but while June 2021’s monthly flows in the EA were slightly below pre-pandemic levels, UK flows (£10bn) remained double the pre-pandemic average of £5bn (see chart above). According to CMMP estimates, excess HH savings in the UK have now reached over £150bn at the end of 1H21 (below official forecasts of £160bn).

**Trends in monthly consumer credit flows** (Source: BoE; ECB; CMMP)

Monthly consumer credit flows have turned positive in both the UK and the EA (see chart above). However, while YoY growth rates turned positive in April in the EA they remain negative (-2.2%) in the UK (see chart below).

**YoY growth in consumer credit since 2016** (Source: BoE; ECB; CMMP)

**Growth in lending minus growth in money supply since 2011** (Source: BoE; ECB; CMMP)

Conclusion

Please note that the summary comments and charts above are extracts from more detailed analysis that is available seperately.

“Structure matters too”

How the structure of global debt is changing and why this matters

The key chart

**Share of government and household debt in global debt since December 2008** (Source: BIS; CMMP)

The key message

With attention focusing mainly on post-pandemic highs in the level of global debt/debt ratios, it is very easy to ignore key changes in the structure of global debt, and why these changes matter.

There has been a marked shift away from household (HH) debt to government debt, at the global level. While HH (and other types of private debt) typically cause crises, government debt typically ends them/reduces their severity. Government deficits also increase the supply of money and depress rates (contrary to popular opinion)
The structure of US and UK debt is now the mirror image of the pre-GFC period. This reduces associated risks since governments face different financial constraints to the HH and NFC sectors and cannot, as currency issuers, become insolvent
A similar but more muted shift has occurred in the euro area (EA) where the structure of debt also differs significantly across the EA’s largest economies
As currency users, EA governments also face different constraints to governments that remain issuers of their own currency. Flaws in the EU’s fiscal architecture were apparent before the pandemic. With budget hawks already calling for a return to EU fiscal rules, policy risks remain elevated
These trends are advanced economy trends not EM ones. With private sector credit accounting for 72% of EM debt, EMs face very different challenges associated mainly with the level of NFC debt and the rate of growth in HH debt (note also that EM debt is increasingly a “China-debt” story)

Global debt dynamics are a key element of CMMP analysis. It is natural to focus initially on the impact of responses to the pandemic on the level of debt. However, a failure to incorporate analysis of the structure, growth and affordability of debt at the same time can lead to false conclusions regarding investment implications. The post-COVID world is very different from the post-GFC world.

Structure matters too

**Trends in global debt and the global debt ratio since 2005** (Source: BIS; CMMP)

Much attention has focused on the impact of the public and private sector responses to the COVID-19 pandemic on the level of global debt and global debt ratios across all sectors (see chart above). All recorded new highs at the end of 4Q20. Less attention has focused, however, on the changing structure of global debt particularly in relation to the pre-GFC period. This posts sets out to correct this by highlighting five key structural changes in global debt and explaining their significance.

Five key changes

**Share of government anf household debt in global debt since December 2008** (Source: BIS; CMMP)

First, at the global level, there has been a shift away from HH debt to government debt (see chart above). This matters because (1) while private sector debt typically causes crises, public sector debt typically ends them/reduces their severity and (2) contrary to mainstream teaching, government deficits increase rather than decrease the supply of money and drive rates down.

**Trends in the share of US and UK government and household debt since 2008** (Source: BIS; CMMP)

Second, following this shift, the structure of US and UK debt is the mirror image of the pre-GFC structure (see chart above). This reduces associated risks since governments face different financial constraints to the HH and NFC sectors and cannot, if currency issuers, become insolvent.

**Trends in shares of EA government, HH and NFC debt since 2008** (Source: BIS; CMMP)

Third, more muted shifts have occurred in the euro area (EA) where the structure of debt still differs significantly across the EA’s largest economies. HH debt accounted for 27% of total EA debt in 1Q08 versus 42% in the US and the UK (see chart above). This share fell to 21% in 4Q20 versus 27% in the US and 30% in the UK respectively. Government debt has increases from 31% to 39% of EA debt versus 45% in the US and 44% in the UK respectively. At the country level, however, the share of government debt in total debt ranges from 60% in Italy to only 20% in the Netherlands (see chart below).

**Changes in structure of debt across EA’s largest economies (Source: BIS; CMMP)**

Fourth, as currency users, EA governments also face different constraints to governments that remain issuers of their own currency. Flaws in the EU’s fiscal architecture were apparent before the pandemic. With budget hawks already calling for a return to EU fiscal rules, policy risks remain elevated.

**Trends in shares of EM government, HH and NFC debt since 2008** (Source: BIS; CMMP)

Fifth, these trends are advanced economy trends not EM ones. With private sector credit accounting for 72% of EM debt, EMs face very different challenges associated mainly with the level of NFC debt and the rate of growth in HH debt (see chart above). Note also that EM debt is also increasingly a “China-debt” story. At the end of 4Q20, China accounted for 67% and 70% of total EM and EM NFC debt respectively (see chart below).

**China’s share of EM total and NFC debt since 2008** (Source: BIS; CMMP)

Conclusion

Global debt dynamics are a core element of CMMP analysis. While it is natural to focus initially on the new highs in the global debt levels and debt ratios across all sectors, it is also important not to miss the important messages associated with changes in the structure, growth and affordability of global debt.

The shift in the structure of global debt from HH debt to government debt has important implications for the severity of recessions, monetary dynamics, inflation, rates and investment risks. The nature of these implications also vary depending on whether governments are currency issuers (eg, US and UK) or currency users (eg, EA governments). The risks of a return to pre-pandemic policy mixes remain in all areas, however. Finally, EMs face very different challenges largely associated with the level of NFC debt, the growth rate in HH debt and the increasing dominance of China in EM debt.

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.

“The UK reflation trade needs refuelling”

Direction versus pace of travel…

The key chart

**Trends in weekly card payments versus pre-COVID levels** (Source: ONS; CMMP)

The key message

In April 2021, I argued that investment narratives, like endurance athletes, require constant refuelling but that it was too early to expect much “refuelling” in terms of the key signals for 2021. This has been true for the UK where the direction of travel has been positive but the pace of travel has been disappointing in relation to trends observed in the euro area (EA).

Monthly flows in household (HH) money, a useful indicator of household uncertainty, have followed the timing of lockdown restrictions closely. They have fallen from £21bn in December 2020 to £7bn in May 2021 but remain 1.5x the average pre-COVID pandemic monthly flows.

CMMP analysis suggests that “excess savings” built up during the pandemic have reached £144bn (slightly below official estimates) or £137bn if a slightly higher level of precautionary savings are maintained. History reminds us that it takes time for excess savings or unanticipated sources of wealth to return in the form of consumption, however. For the first time since August 2020, UK consumers borrowed more than they paid off in May 2020 (£0.3bn) but the annual growth rate remained weak (-3.2% YoY).

So-called “faster indicators” such as UK spending on debit and credit cards send the same message. Spending continues to recover but remains below pre-pandemic levels. UK HHs are increasing spending on getting to work but spending on “delayable” goods has lost some momentum and remains below pre-COVID levels. This morning (9 July 2020), ONS statistics show GDP growing 0.8% in May 2021, the fourth consecutive month of growth, but below expectations and 3.1% below pre-COVID levels.

The UK reflation trade is in need of more sustained refuelling…

The key message in six charts

**Monthly flows of HH money holding since January 2019** (Source: BoE; CMMP)

**CMMP estimates of build up of “excess savings” during the COVID-19 pandemic** (Source: BoE, CMMP)

**Trends in UK consumer credit since January 2020** (Source: BoE; CMMP)

**Aggregate weekly card payments in 2021 versus pre-COVID levels** (Source: ONS; CMMP)

**Card payments versus pre-COVID levels by type of spending** (Source: ONS; CMMP)

**ONS estimates for monthly GDP, 2018 = 100** (Source: ONS; CMMP)

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.

“We cannot waste the opportunity”

This is not the time to ignore Panetta’s warnings

The key chart

The key message

The EA may be leading the UK in a steady and synchronised recovery but this is not the time to repeat the post-GFC policy mistakes.

What are the euro area (EA) and UK money sectors telling us about the nature of the recovery from the COVID-19 pandemic?

The deflationary forces that drove the acceleration in broad money during the pandemic have peaked. Household (HH) uncertainly is falling, especially in the EA (key signal #1). Monthly flows in consumer credit were positive in May in both regions and the EA registered positive YoY growth in consumer credit for the second month running (key signal #2).The gap between lending growth and money growth is narrowing from recent record highs but both regions remain a long way from normalised money and credit cycles (key signal #3).

The 2Q21 message from the money sector is clear – the EA is leading the UK in a steady and synchronised recovery from the COVID-19 pandemic (so far), but with a challenging policy context looking forward. The comments from ECB Executive Board member, Fabio Panetta, that, “Combined fiscal and monetary support has lifted the economy out of the state of the emergency” appear well founded in this context.

The tentative nature of the recovery to date places even more importance on Panetta’s conclusion that, “We cannot waste the opportunity of having, for the first time in more than a decade, a combination of expansionary monetary and fiscal policies and a global reflationary environment to re-anchor inflation expectations to our target.”

This is not the time to repeat the post-GFC policy mistakes.

2Q21 messages from the money sectors

**M3 increasingly driven by M1 or narrow money** (Source: BoE; ECB; CMMP)

The deflationary forces that drove the acceleration in broad money during the pandemic have peaked. As can be seen in the chart above, narrow money (notes and coins in circulation and overnight deposits, or M1) represents an increasingly large proportion of broad money (M3) in both regions.

In May 2021, M1 accounted for 72% and 68% of M3 in the EA and UK respectively. This compares with 45% and 47% respectively in May 2009 and the GFC period. The key point here is that money sitting idly in overnight deposits contributes to neither growth nor inflation.

**Different drivers, different implications** (Source: ECB; CMMP)

As noted in previous posts (see “Don’t confuse the message”), it is important not to confuse the messages from the pre-GFC and COVID-19 periods of broad money expansion (see EA chart above). The message from the former period was one of over-confidence (low M1 contribution) and excess credit demand (high PSC contribution). In contrast, the recent message has been one of heightened uncertainty (high M1 contribution) and subdued credit demand (low PSC contribution). In short, recent money growth reflects fiscal and monetary easing in response to weak private sector demand and rising savings (with the added uncertainty regarding the extent to which rising savings are forced or precautionary).

Key signal #1 revisited

HH uncertainly is falling, especially in the EA (key signal #1). Monthly HH deposit flows are moderating in both regions. During the pandemic, HHs in both regions increased their money holdings despite earning negative returns – a combination of forced and precautionary savings. At their respective peaks, monthly flows were 2.4x (March 2020) and 6.0x (May 2020) their pre-Covid levels in the EA and UK respectively (see chart above).

In the EA, monthly flows were €31bn in May (up from €20bn in April) compared to the €33bn average flows seen during 2019. This was the second consecutive month when monthly flows were below their pre-COVID levels. In the UK, monthly flows were £7bn in May 2021, down from £9bn in April 2021, but still 1.5x their 2019 average of £5bn.

Key signal #2 revisited

**Trends in monthly consumer credit flows since January 2020** (Source: BoE; ECB; CMMP)

**YoY growth in consumer credit over past five years** (Source: BoE; ECB; CMMP)

Monthly flows in consumer credit were positive in May in both regions and the EA registered (slightly) positive YoY growth in consumer credit for the second month running (key signal #2).

HHs in the EA and UK borrowed €1.5bn and £0.3bn as consumer credit respectively in May 2021. This is the first time since August 2020 that UK consumers have borrowed more than they paid off. The Bank of England reported that this increase reflected £0.4bn in “other” forms of consumer credit such as card dealership finance and personal loans. In contrast, credit card lending remained weak with a net repayment of £0.1bn.

The EA has registered growth rates of 0.3% and 0.6% YoY in April and May 2021. In the UK, consumer credit fell -3.2% from -5.7% in April and the historic low of -10% in February 2021.

Key signal #3 revisited

**Growth in lending minus growth in money suppy since April 2011** (Source: BoE; ECB; CMMP)

The gap between lending growth and money growth is narrowing from recent record highs but both regions remain a long way from having normalised money and credit cycles (key signal #3).

Recall that in typical cycles, monetary aggregates and their key counterparts (eg credit to the private sector) move together. Money supply indicates how much money is available for use by the private sector. Private sector credit indicates how much the private sector is actually borrowing.

The gap has narrowed to 5.7ppt in the EA and 6.9ppt in the UK from recent, record highs of 8ppt (January 2021) and 11.4ppt (February 2021) respectively. This narrowing reflects a slowdown in both money supply and private sector credit, especially in the NFC sector.

Note that: (1) the effectiveness of monetary policy relies, in part, on certain stable relationships between monetary aggregates and their counterparts; and (2) that the desynchronization of money and credit cycles during the pandemic was unprecedented in both the EA and the UK.

**Trends in lending by type since May 2019** (Source: BoE; ECB; CMMP)

Conclusion

In this context, the comments from ECB Executive Board member, Fabio Panetta, that, “Combined fiscal and monetary support has lifted the economy out of the state of the emergency” appear well founded.

This is not the time to repeat the post-GFC policy mistakes.

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.

“Forming an orderly queue…?”

…or is the recovery in UK spending stalling?

The key chart

The key message

Are UK consumers merely forming orderly queues or is the recovery in consumption stalling already?

Aggregate card purchases have fallen back from the recent peak of 106% pre-COVID spending (5 May 2021) to 90% pre-Covid spending according to the latest ONS “experimental faster indicators“.

Spending across all categories is higher than at the start of the year although aggregate, delayable and social spending all remain below pre-Covid levels. With the exception of staples, all consumption categories have seen an increase in spending since the period before restrictions on the opening of non-essential stores were eased on 12 April. The largest increases over this period have been in work-related (25ppt) and delayable spending (22pt).

Spending on delayable goods (eg, clothing, furniture) is a useful indicator regarding the extent to which the £160bn in excess savings built up during the pandemic is returning to the economy via consumption. These purchases recovered strongly to reach a YTD high of 122% pre-COVID spending on 19 April. Momentum has slowed since then, however, with the latest data indicating delayable spending at only 84% of pre-COVID levels.

As before, the ONS’ real time indicators continue to a point to a steady recovery in UK credit and debit card purchases. At the same time, they are likely to disappoint those hoping for a more rapid recovery in consumption. As equity markets have transitioned from their “hope” to “growth” phases, much of the expected future growth in cash flows has been paid for already. A next leg may require more concrete evidence of sustained growth in consumption.

Forming an orderly queue…?

Aggregate card purchases in the UK have fallen back from their 5 May 2021 peak of 106% pre-COVID spending to 90% in the week to 17 June 2021 (see key chart above). All spending categories with the exception of “work-related” spending decreased over the latest weekly period. The data series shown here is part of the ONS’ “experimental faster indicators” for estimating UK spending on credit and debit cards, which track daily CHAPS payments by credit and debt card payment processors to around 100 major UK retail outlets.

Spending across all categories (delayable, social, staple, and work-related) is higher than at the start of the year. The largest increases in spending have been in work-related (57ppt), social (34ppt) and delayable (30ppt) goods. Aggregate, delayable and social spending all remain below pre-COVID levels, however (see chart above).

**Card spending by type since relaxation of restrictions on store openings** (Source: ONS; CMM)

With the exception of staples, all consumption categories have seen an increase in spending since the period before restrictions on the opening of non-essential stores were eased on 12 April (see chart above). The largest increases over this period have been in work-related (25ppt) and delayable spending (22pt).

**Recent trends in aggregate card spending and spending on delayable goods** (Source: ONS; CMMP)

Conclusion

In May, I suggested that, “As equity markets transition between their “hope” and “growth” phases, investors who have already paid for expected future growth may well pause at this stage and wait for more concrete evidence of a sustained recovery”. The UK narrative remains the same.

“Steady as she goes”

UK spending recovery is steady rather than dramatic

The key chart

**Aggregate credit and debit card purchases versus February 2020 (pre-COVID) average** (Source: ONS; CMMP)

The key message

ONS real-time indicators continue to point to a steady recovery in UK credit and debit card purchases but may disappoint those hoping for a rapid recovery in consumption.

The charts that matter

Aggregate card purchases fell from 106% of average February 2020 spending (pre-Covid) on 5 May 2021 to 95% on 27 May 2021 (see key chart above). Spending on so-called “delayable” and “staple” goods also fell during May (MTD). In contrast, “social” spending rose from 76% to 85% and “work-related” spending increased from 100% to 104%.

**May 2021 versus the start of the year – a recovery across the board** (Source: ONS; CMMP)

Spending across all categories is higher in relation to pre-COVID levels than in January 2021 but only staples and work-related spending are above pre-COVID levels (see chart above).

**CMMP estimates of excess HH savings built up during the COVID-19 pandemic** (Source: CMMP)

Spending on delayable goods (eg, clothing, furniture) is a useful indicator of the extent to which the c.£160bn of excess savings built up during the pandemic (see chart above) is returning to the economy via consumption.

**Recovery in delayable spending has lost momentu**m (Source: ONS; CMMP)

These purchases recovered strongly following the reopening on non-essential stores (12 April) to reach recent highs of 122% (19 April) and 112% (5 May) of pre-COVID spending. Momentum has slowed since then, however, with the latest data indicating delayable spending at 91% of pre-COVID levels (see chart above).

**Change in index of card purchases YTD** (Source: ONS; CMMP)

It is reasonable to expect volatility in faster-indicators and dangerous, therefore, to draw too many conclusions from short-term movements. The core message remains that the consumption is recovering but at a steady rather than rapid pace. Unsurprisingly, the strongest recovery YTD has been in work related spending (see chart above).

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.

“Consistent messages through atypical cycles”

Synchronised messages from the UK and EA money sectors

The key chart

**Don’t misread the messages from macro variables – this is an atypical cycle** (Source: BoE; ECB; CMMP)

The key message

It is important not to confuse the decline and recovery in economic activity over the past twelve months with typical economic cycles.

Headline growth figures in key macro variables, including monetary aggregates, have been open to misinterpretation, leading to many false narratives regarding their implications for investment decisions and asset allocation. In this context, CMMP analysis has gone beyond the headlines to identify three key signals that help to interpret current trends in the UK and EA effectively. These signals focus on HH behaviour, the consumption/growth outlook and the policy context.

The messages from the UK and EA money sectors are remarkably consistent in direction if not in magnitude.

Monthly HH deposit flows are moderating in both regions (key signal #1), especially in the EA, suggesting that uncertainty levels are falling. That said, HHs are still repaying down consumer credit (key signal #2), albeit at a slower pace (n.b. the YoY growth rate in consumer credit turned positive in the EA for the first time since last summer). Policy makers still face considerable challenges due to the on-going desynchronization of money and credit cycles, however (key signal #3). The resilience in mortgage demand and on-going house price rises bring additional challenges that complicate policy choices further.

Sustained recoveries require further moderations in HH deposit flows, a recovery in consumer credit, and a resynchronisation in money and credit cycles. The UK displays higher gearing than the EA to each of these key drivers but is lagging the EA in terms of positive signals so far…

Consistent messaging through atypical cycles

The UK and euro area (EA) money sectors have provided consistent messages regarding household (HH) behaviour, the consumption/growth outlook and the policy context in their respective regions throughout the COVID-19 pandemic.

**HH monthly money flows as a multiple of 2019 average monthly flows** (Source: BoE; ECB; CMMP)

Monthly HH deposit flows provide important insights into HH behaviour. During the pandemic, HHs in both regions increased their money holdings at elevated rates, despite earning negative returns. This behaviour contributed to neither growth nor inflation.

Deposit flows declined in both regions at the start of 2Q21 (see chart above). In the EA, monthly flows fell to €19bn in April 2021 from €62bn in March 2021. This is the first time since March 2020 that these flows have fallen below the €33bn average monthly flows seen during 2019. In the UK, monthly flows fell to £11bn in April 2021 from £16bn in March 2021, the smallest net flow since September 2020. While the direction of travel is the same in both regions, monthly money flows in the UK remain 2.3x above their 2019 average of £5bn.

**YoY growth rates in consumer credit** (Source: BoE; ECB; CMMP)

While uncertainty is falling in both regions, consumption remains subdued. On a positive note, the YoY growth rate in consumer credit in the EA turned positive (0.3%) for the first time since August 2020 (see chart above). In contrast, growth remained negative in the UK (-5.7%) albeit less negative than the historic low of -10% recorded in February 2021.

That said HHs in both regions repaid consumer credit during April 2021 (see chart below). While this is not a positive signal for growth, the scale of repayments is slowing at least. In the UK, for example, net repayments of £0.4bn was less than seen on average each month over the previous year (£1.7bn).

**Monthly flows in UK and EA consumer credit** (Source: BoE; ECB; CMMP)

The policy context remains challenging, however, especially for central bankers. The effectiveness of monetary policy relies, in part, on certain stable relationships between monetary aggregates. The desynchronization of money and credit cycles during the pandemic was unprecedented in both the UK and the EA.

**Trends in the gap between growth in lending and growth in money supply** (Source: BoE; ECB; CMMP)

The gap between YoY growth rates in private sector lending and money supply hit historic highs of 11ppt in the UK in February 2021 and 8ppt in the EA in January 2021. These gaps narrowed to 9ppt and 6ppt respectively in April. Nevertheless, they remain very wide in a historic context (see chart above).

Conclusion

To repeat, it is important not to confuse the decline and recovery in economic activity over the past twelve months with typical economic cycles.

The messages from the UK and EA money sectors are remarkable consistent in direction if not in magnitude. Monthly HH deposit flows are moderating (key signal #1), especially in the EA, suggesting that uncertainty levels are falling. That said, HHs are still repaying down consumer credit (key signal #2), albeit at a slower pace (and the YoY growth rate in consumer credit turned positive in the EA for the first time since last summer). Policy makers still face considerable challenges due to the on-going desynchronization of money and credit cycles, however. The resilience in mortgage demand and on-going house price rises bring additional challenges that complicate policy choices further.

Please note that the summary comments and charts above are summaries from more detailed analysis that is available separately.

“Herd immunity?”

Resilience and risks in global housing

The key chart

**Trends in global house prices since the GFC** (Source: BIS; CMMP)

The key message

Anyone looking for evidence of COVID-19 “herd immunity” need look no further than global housing markets!

House prices rose 4% globally in 2020 in real terms, the fastest rate of growth since the GFC. Prices rose 7% in advanced economies, compared with a more modest 2% in emerging economies. House price resilience during the pandemic reflects many factors: a recovery in HH incomes thanks to continued policy support; lower borrowing costs; reduced supply as construction activity slowed; temporary tax breaks; and perceptions that housing was/is a relatively safe investment.

The combination of rising prices and an uncertain macro backdrop has kept measures of overvaluation elevated. In the euro area, for example, above average increases in house prices occurred in Luxembourg, Slovakia, Estonia, Portugal, Denmark, Austria, the Netherlands and France. With the exception of Estonia, estimates suggested overvaluation in each of these countries before the start of 2020, notably in Luxembourg, Denmark and Austria. Similarly, the Bank of England indicated unease about the UK housing market recently (1 June 2021) after the Nationwide Building Society said that prices were growing at their fastest pace since 2014.

Current EA housing and lending dynamics reflect Minsky’s hypothesis that, over the course of a long financial cycle, there will be a shift towards riskier and more speculative sectors. The flow of funds towards property and financial asset markets (FIRE-based lending) is increasing at the expense of more productive flows to the real economy (COCO-based lending). FIRE-based lending in the EA hit a new high of €5,905bn in April 2021 and accounts for 52% of total lending with negative implications for leverage, growth, stability and income inequality.

Resilience and risks in global housing

Anyone looking for evidence of COVID-19 “herd immunity” need look no further than global housing markets! House prices rose 4% globally in 2020 (in real terms) according to latest BIS data release, the fastest rate of growth since the GFC. Prices are now 21% higher than their average after the GFC (see chart below).

**Real price change in 2020 plotted against real price change since the GFC** (Source: BIS; CMMP)

Prices rose 7% in “advanced economies” (especially New Zealand, Canada, Denmark, Portugal, Austria, Germany, US) compared with a more modest 2% in “emerging economies.” The resilience of housing markets reflects many factors: a recovery in HH incomes thanks to continued policy support; lower borrowing costs; reduce supply as construction activity slowed; temporary tax breaks; and the perceptions that housing was/is a relatively safe investment.

**EA trends – 2020 price change ploted against valuation at end-2019** (Source: ECB; CMMP)

The key risk here is that the combination of rising prices and an uncertain macro backdrop have kept measures of overvaluation elevated.

In their latest Financial Stability Review, for example, the ECB notes that “house price growth during the pandemic has generally been higher for those countries that were already experiencing pronounced overvaluation prior to the pandemic (see chart above).”

The largest/above average increases in house prices during 2020 in the EA occurred in Luxembourg (17%), Slovakia (16%), Estonia (9%), Portugal (9%), Denmark (9%), Austria (7%), the Netherlands (7%) and France (6%). With the exception of Estonia, ECB estimates suggest that house prices were overvalued in each of these countries before the start of 2020, notably in Luxembourg (39% overvalued, not shown in graph above), Denmark (16% overvalued) and Austria (15% overvalued).

On the 7 June 2021, the BIS will release 4Q20 credit and affordability data which will provide further insights into the risks associated with housing trends in the EA and the rest-of-the-world.

**The rise in FIRE-based lending in the euro area** (Source: ECB; CMMP)

In recent posts, I have noted an adaptation of Hyman Minsky’s hypothesis that states that over the course of a long financial cycle, there will be a shift towards riskier and more speculative sectors.

Minsky’s theory can be applied to the house price trends described above and to HH lending trends described in previous posts. Minsky’s “shift” is reflected in the decline in bank credit to the real sector (COCO-based credit) and an increase in funds flowing towards property and financial asset markets (FIRE-based credit).

FIRE-based lending in the EA hit a new high of €5,905bn in April 2021 and accounts for 52% of total lending with negative implications for leverage, growth, stability and income inequality.

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.