The key chart
Quarterly consumer credit flows as a multiple of pre-pandemic average flows (Source: BoE; ECB; CMMP)
The key message
The ECB and Bank of England are expected to deliver 50bp rate increases today (2 February 2023) in the face of relatively subdued (euro area) and slowing (UK) demand for consumer credit.
Both regions have experienced seven consecutive quarters of positive demand for consumer credit since 1Q21 (see key chart above). Euro area (EA) demand has remain relatively subdued, however, and has failed to recover to pre-pandemic levels. Quarterly consumer credit flows, for example, ended 2022 at €5.0bn, only 0.5x the pre-pandemic average of €10.3bn. UK consumer credit demand hit £4.4bn in 2Q22 (1.2x the pre-pandemic average flow of £3.6bn) but slowed to £2.8bn in 4Q22 (0.8x the pre-pandemic average flow).
This matters for two reasons:
- First, increased borrowing is one way that EA and UK households can offset the pressures from falling real disposable incomes (along with reduced savings);
- Second, consumer credit is the second most important element of productive COCO-based lending, after corporate credit. It supports productive enterprise since it drives demand for goods and services, hence helping corporates to generate sales, profit and wages.
The EA and UK money sectors are both sending clear messages of slowing demand for consumer credit and mortgages. The contrast with the US is interesting – the FED is slowing the pace of rate increases to 25bp despite the fact that US consumer credit flows remain well above their pre-pandemic levels.
Please note that the summary comments and chart above are abstracts from more detailed analysis that is available separately.