The key chart
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
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).
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).
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 (see chart below).
Conclusion
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.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available seperately.