The key chart
Quarterly consumer credit flows expressed as a multiple of pre-pandemic average flows (Source: FRED; BoE; CMMP)
The key message
In May 2023, I asked, “have US and UK consumers read the recession script?” I noted that, “despite rising borrowing costs, quarterly consumer credit flows in 1Q23 remained above pre-pandemic levels. Fast-forward another quarter and the question remains largely the same – when will US and UK consumers read the recession script?
Contrasting consumer credit dynamics suggests divergent growth outlooks for investors and different challenges for the Federal Reserve, the Bank of England and the ECB.
US consumer credit demand has moderated from its elevated 2022 levels, but remains above pre-pandemic average levels. UK consumer credit demand remains surprisingly resilient, and above pre-pandemic levels too. Chair Powell and Governor Bailey face similar challenges as consumers continue to borrow to support consumption despite rising borrowing costs.
The contrast with consumer credit dynamics in the euro area (EA) is sharp. EA consumer credit demand remains subdued and well below pre-pandemic levels. President Lagarde faces a very different balancing act between weaker growth/recession and lower inflation.
In short, the messages from the US, UK and EA money sectors remind us that the risks of policy errors remain elevated in all three regions but for contrasting reasons…
When will US and UK consumers read the recession script?
Quarterly US consumer credit flows (Source: FRED; CMMP)
US consumer credit demand is moderating sharply but remains above pre-pandemic levels. Quarterly flows of consumer credit have fallen from $87bn in 4Q22 to $52bn in 1Q23 and $50bn in 2Q23, but remain above their pre-pandemic level of €45bn (see chart above).
Monthly US consumer credit flows (Source: FRED; CMMP)
The monthly flow of US consumer credit was more volatile during the 2Q23 (see chart above). Flows ranged from $22.3bn (1.5x pre-pandemic average) in April 2023 to only $9.5bn (0.6x pre-pandemic average) in May 2023 and then $17.8bn (1.2x pre-pandemic flow) in June 2023.
Quarterly UK consumer credit flows (Source: BoE; CMMP)
UK consumer credit demand remains surprisingly resilient. Quarterly flows increased from £3.1bn in 4Q22 to £4.5bn in 1Q23 and £4.3bn in 2Q23. These flows were 0.9x, 1.2x and 1.2x the pre-pandemic average quarterly flow of £3.6bn (see chart above).
Monthly UK consumer credit flows (Source: BoE; CMMP)
Monthly flows during the 2Q23 were £1.6bn, £1.1bn and £1.7bn in April, May and June 2023 respectively. These flows were 1.6x, 1.1x and 1.7x the pre-pandemic average flows respectively. (see chart above).
Quarterly EA consumer credit flows (Source: ECB; CMMP)
Euro area consumer credit demand remains consistently subdued, in sharp contrast to trends observed in both the US and the UK. Quarterly flows have fallen from €5.2bn in 4Q22 to €4.2bn in 1Q23 and €3.4bn in 2Q23, the lowest quarterly flow since 2Q21 (see chart above). Quarterly flows have failed to recover to their pre-pandemic level of €10.3bn.
Monthly EA consumer credit flows (Source: ECB; CMMP)
Monthly flows have also declined during the quarter from €2.0bn in April to €1.3bn in May to only €23m in June 2023 (see chart above). As noted in previous posts, the fact that demand for consumer credit remains very subdued in absolute terms and in relation to trends observed in the US and the UK makes the ECB’s tasks slightly easier (while elevating policy risks at the same time).
Conclusion
Contrasting consumer credit dynamics suggests divergent growth outlooks for investors and different challenges for the Federal Reserve, the Bank of England and the ECB.
Demand is moderating sharply in the US but remains resilient and above the levels seen pre-pandemic, at least so far. UK demand also remains surprisingly resilient and above pre-pandemic levels, at least for the time being (and as suggested by OBR forecasts). Chair Powell and Governor Bailey face similar challenges as consumers continue to borrow to support consumptions despite rising borrowing costs.
In contrast, the message from the money sector for EA growth is much weaker and presents President Lagarde with a very different balancing act between weaker growth/recession and lower inflation.
The risks of policy errors remain elevated in all three regions but for contrasting reasons…
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.