The key chart
Lesson #5
The UK and EA money sectors have been sending very similar messages during the pandemic, albeit it with more volatile YoY trends in the UK. Broad money is growing at the fastest rate since April 2008 in both regions with narrow money’s contribution to total money also reaching historic highs.
The overriding message here is that uncertainty reigns with HHs and NFCs maintaining a preference for holding highly, liquid assets despite earning negative/very low real returns. From a counterparts perspective, above trend NFC credit and resilient mortgage demand have been offsetting weak consumer credit. But again, the dominate message is one of subdued credit demand – the gap between money supply and private sector credit demand continues to hit new highs.
“Uncertainty” and “subdued credit demand” are four key words missing from the inflation hawks’ current narrative!
Looking forward, the key unknown is the extent to which increased savings are forced or precautionary. The OBR may be too optimistic in the assumed extent of recovery in HH consumption, but there is evidence here to suggest that the UK is likely to demonstrate a higher ST gearing to a return to normality than the EA.