The key chart
The key message
The behaviour of UK and euro area households reached a potentially important inflexion point at the start of 4Q21. Household (HH) money flows moderated sharply in October 2021 while monthly flows of consumer credit hit new YTD highs.
Recall that HHs increased their money holdings significantly during the pandemic and built up (estimated) excess savings of £162bn in the UK and €285bn in the EA – a combination of forced and precautionary savings. This meant that the rise in broad money during the pandemic was a reflection of the deflationary forces of increased savings and delayed consumption.
The accumulation of money holdings peaked during 2Q20 and again in 4Q20 and the low point in terms of YoY declines in consumer credit demand was passed in February 2021. Monthly flows of consumer credit have been positive for the past six months and hit YTD highs in October 2021 in both regions. At the same time, the accumulation of money holdings has fallen back to 1.2x and 0.6x pre-pandemic levels in the UK and EA respectively.
Unfortunately, the recent rise in COVID-19 cases, the emergence of the omicron variant and renewed restrictions imposed by the UK and EA governments may result in these points being missed, or, worse still, the positive trends being reversed. That said, firmer economic foundations in both the UK and EA (and higher levels of vaccinations) suggest that both regions are in a stronger position to face renewed COVID challenges than they were a year ago.
Missing the point – the charts that matter
HH money flows
HHs in the UK and EA increased their money holdings significantly during the COVID-19 pandemic. Monthly flows peaked at 6x pre-pandemic levels in the UK in May 2020 (see chart above) and 2.4x pre-pandemic levels in the EA a month earlier (see chart below). At the start of 4Q21, they had moderated to 1.2x and 0.6x pre-pandemic levels in the UK and EA respectively. A key building block for a sustained economic recovery.
Excess HH savings
In aggregate, and as a result, HHs have built up excess savings in the form of bank deposits of £162bn in the UK (see chart above) and €285bn in the EA (see chart below) since February 2020. These reflect a combination of forced savings (that may be released relatively quickly to support economic activity) and precautionary savings (that are unlikely to move straight into investment of consumption).
As noted back in May (see “More bullish on UK consumption”) and confirmed by the ECB in August 2021 (see “Economic Bulletin, Issue 5”). The majority of these accumulated savings have accrued to HHs that already have sizeable savings, have higher incomes, and are older. Such HHs typically spend less from any extra savings they accumulate i.e. they have relatively low marginal propensities to consume. The release of these excess savings is likely to be only partial and gradual, therefore.
Impact on monetary aggregates
HH behaviour had a marked impact on money supply dynamics during the pandemic with narrow money (M1) representing an ever-larger share of broad money (M3) in both the UK and EA (see chart above). As an example, overnight deposits contributed 6.8ppt to the total EA broad money growth of 7.6% in October 2021 alone (see chart below).
This matters because the expansion of broad money during the pandemic reflected the deflationary force of HHs increasing their savings and delaying consumption. Money sitting in overnight deposits contributes to neither growth nor inflation.
HH demand for consumer credit
Annual growth rates in consumer credit reached a low point in February 2021 in both the UK (-10% YoY) and the EA (-3% YoY). The rate of decline has narrowed subsequently to -1.0% in the UK in October. In the EA, annual growth rates turned positive two months later in April 2020 (see chart above).
More importantly, monthly flows of consumer credit have been positive for the past six months and reached their highest levels YTD in both the UK (£0.7bn) and EA (€2.7bn) respectively (see chart above).
Conclusion
A moderation in monthly HH money flows and a recovery in demand for consumer credit represent important foundations for a sustained recovery in the UK and the EA. The rise in COVID-related risks comes at a very delicate and unfortunate time, therefore, for the recovery in both regions. It remains too early to say whether recent events will reverse these dynamics in a meaningful manner. The positive news is that firmer economic foundations in both the UK and EA suggest that both regions are in a stronger position to face these challenges than they were a year ago.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.