The key chart

Summary

Risks to the UK growth outlook and bank lending from weakness in the household (HH) sector were evident before the Covid-19 pandemic hit. The “message from the money sector” (and from this week’s Bank of England monetary data) is that these risks rose at unprecedented rates at the start of 2Q20.

HHs increased deposit holdings in April 2020 by four-times the average monthly amount seen over the past two decades, despite negative real deposit rates. At the same time, they repaid debt in record amounts, notably consumer debt. Mortgage approvals also collapsed and mortgage lending grew at the lowest monthly rate since December 2011.

While it is dangerous to over-interpret one month’s data, the early message is clear:  with UK HHs displaying “extreme caution not consumption” and repaying debts despite low costs of borrowing, the on-going risks to a v-shaped recovery and to the UK banking sector profitability have risen sharply.

Caution not consumption

In “Poised to disappoint”, I highlighted the dominant role that HHs play in UK economic activity (FCE/GDP) and bank lending (the desire to buy properties). The HH sector had been funding recent consumption by dramatically reducing its savings rate and accumulation of net financial assets. With real growth in disposable income slowing and the savings rate close to historic lows, I concluded that the risks to UK growth lay to the downside even before Covid-19 hit.

The current “message from the money sector” is that these risks have risen sharply and at an unprecedented rate. April’s monetary aggregates (released on 2 June 2020) showed that HHs increased their holdings of deposits by £16bn in April 2020, a rate that is 4x the size of the average monthly increase of the past twenty years and despite negative real rates of return.

Interest rates on new time deposits fell 15bp to 0.98% while rates on sight deposits fell slightly to 0.41%. Deposit rates remain negative in real terms but less so than in the recent past due to the decline in inflation below 1.0%. The key message here is the HH sector’s rising preference for liquidity indicates very high levels of caution and a low appetite for risk.

At the same time, HHs are repaying debt in record amounts most notably consumer debt. They repaid £7.4bn of consumer debt in April 2020, twice the amount repaid in March. These repayments were the largest net repayments since the series began and unprecedented in scale (see graph below).

The largest repayments (£5.0bn) were on credit cards, but HH also repaid £2.4bn of “other loans” (eg, car finance). In March and April, credit cards fell -0.3% and -7.8% YoY compared with 3.5% growth in February. Growth in other loans fell from 6.8% in February to 5.6% in March and 3.1% in April. While the slowdown in consumption is not surprising, its scale and pace send important signals regarding the hit to future consumption.

The money sector is also sending important messages about weakness in the housing market. Approvals for house purchase and remortgage have fallen 78% and 34% since February. Lending has also fallen rapidly. New mortgage borrowing fell 38% from £23.1bn in February to £14.1bn in April. At the same time, repayments also fell 26% from £18.8bn to £13.bn, reflecting (in part) the effect of payment holidays.

With gross lending falling faster than repayments, net mortgage borrowing rose by only £0.3bn in April compared with an average rise of £4.5bn over the previous six months. This net increase was the lowest since December 2011.

Conclusion

It is dangerous to over-interpret one month’s data. Nevertheless, the early 2Q20 message from the money sector is clear:  with HHs displaying “extreme caution not consumption” and repaying debts despite low costs of borrowing, the on-going risks to a v-shaped recovery and to the UK banking sector profitability have risen sharply.

Please note that the summary comments above are extracts from more detailed analysis that is available separately.