Tag: #consumercredit

“Does President Lagarde have an easier job…”

…than Chair Powell or Governor Bailey?

The key chart

Quarterly consumer credit flows expressed as a multiple of pre-pandemic average flows (Source: ECB; FRED; BoE)

The key message

Does President Lagarde have an easier job than Chair Powell or Governor Bailey? In one important respect, yes.

Demand for consumer credit remains very subdued in the euro area (EA) in absolute terms and in contrast to trends observed in the US and the UK.

The European Central Bank (ECB), Federal Reserve and Bank of England each face delicate balancing acts between reducing inflation (their core mandates) and weaker growth. On the one hand, higher interest rates are supposed to deter borrowing and hence reduce aggregate demand and inflation. On the other hand, increased borrowing is one way that households can offset the pressures of falling real incomes.

“Higher interest rates provide incentives to households to save more now and postpone consumption from the present to the future”

Philip Lane, October 2022

In terms of reducing inflation, the fact that demand for consumer credit remains very subdued in absolute terms and in contrast to trends observed in the US and the UK makes President Lagarde’s task easier (if not easy!).

The EA has experienced eight consecutive quarters of positive consumer credit flows since 2Q21 (see key chart). These flows have yet to recover to their pre-pandemic levels, however. In 1Q23, the quarterly flow totalled €4.1bn, down from €5.2bn and €4.9bn in 4Q22 and 3Q22 respectively. Perhaps more importantly, the 1Q23 flow was only 0.4x the pre-pandemic average quarterly flow of €10.2bn.

Investors positioned for growth in the EA might take some comfort from the recovery in consumer demand in March 2023. The monthly flow rose to €2.6bn from €1.6bn in February 2023, but was still only 0.76x the pre-pandemic average flow of €3.4bn.

That said, the relatively subdued nature of EA consumer credit demand suggests that the risks to the ECB’s balancing act lie more towards weaker growth/recession. A different balance of risks to those faced by Chair Powell and Governor Bailey.

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

“Not so synchronised!”

Contrasting messages from the UK and EA money sectors

The key chart

Trends in monthly consumer credit flows expressed as a multiple of pre-pandemic averages (x) (Source: BoE; ECB; CMMP)

The key message

While the UK and euro area (EA) money sectors are sending consistent messages about the slowdown in mortgage demand, their messages about consumer credit demand are contrasting and diverging.

Monthly consumer credit flows recovered in the UK in January 2023, back to their pre-pandemic levels and to their highest level since June 2022. In contrast, they fell and remain depressed in relation to their pre-pandemic levels in the EA.

This matters for two reasons: (1) increased borrowing is one way that households can offset the pressures from falling real incomes and (2) consumer credit is the second most important element of productive COCO-based lending.

More policy challenges for the ECB…

Not so synchronised

UK consumer credit flows

The monthly flow of UK consumer credit increased to £1.6bn in January 2023, from £0.8bn in December 2022. This was the highest net borrowing since June 2022 and was 1.3x the pre-pandemic flow of £1.2bn. The 3m MVA of consumer credit flows increased to £1.2bn in January, from £1.0bn in December, very slightly above the pre-pandemic flow (see chart below).

Monthly flows of UK consumer credit (£bn)
(Source: BoE; CMMP)

EA consumer credit flows

In contrast, the monthly flow of EA consumer credit fell to €0.3bn in January, down from €1.5bn in December and only 0.1x the pre-pandemic average flow of €3.4bn. The 3m MVA of consumer credit flows decreased to €1.3bn in January, from €1.7bn in December, 0.4x the pre-pandemic average flow.

Note that consumer credit flows in the EA have failed to recover to their pre-pandemic levels (see chart below).

Monthly flows of EA consumer credit (EUR bn)
(Source: ECB; CMMP)

Why this matters

This matters since increased borrowing is one way that UK and EA HHs can offset the pressures from falling disposable incomes (along with reduced savings).

Consumer credit is also 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, profits and wages.

More policy challenges for the ECB…

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

“Risky US consumer credit dynamics?”

Assessing the state of the US consumer balance sheet

The key chart

Trends in the stock of US consumer credit ($tr) and the consumer credit to DPI ratio (%)
(Source: FED; CMMP)

The key message

What are the implications of buoyant US consumer credit flows for the state of household balance sheets?

Consumer credit is the second largest financial liability for US households (24% total) after mortgages (64% total). This structure has changed little over the past 20 years, although the relative importance of mortgages (up then down) and consumer credit (down then up) fluctuated in the interim period.

Consumer credit displays a relatively stable relationship with disposable personal income (DPI). The recent moderation in monthly credit flows is consistent with the consumer credit to DPI ratio being at high end of its narrow, historic range (at the end of 3Q22).

Mortgage debt, in contrast, displays a more volatile relationship with DPI. Importantly, the deleveraging of the US HH sector in the post-GFC period is due almost exclusively to a reduction in excess mortgage indebtedness. Consumer credit indebtedness is largely unchanged.

Two key messages here:

  1. It is reasonable to assume that the demand for consumer credit will continue to moderate, putting pressure on consumption in the process
  2. Overall HH sector risks associated with the level of indebtedness and affordability of debt remain more manageable than in the pre-GFC period

Recall that the US led advanced economies in the structural shift away from relatively high-risk HH debt towards relatively low-risk public debt in the post-GFC period.

More elevated HH debt risks can be found elsewhere…

Risky US consumer credit dynamics?

In my previous post, I noted that US consumers were doing their level best to counter the “US slowdown” narrative. While consumer credit demand has moderated from its recent highs, monthly flows in November 2022 were still almost double their pre-pandemic average flow. In response, I was asked what this means for the state of consumer balance sheets. This post provides a summary response.

How important is consumer credit?

Trends in stock of consumer credit broken down by type
(Source: FED; CMMP)

Consumer credit is the second largest financial liability for US households (24% total), after mortgage debt (64% total). The structure of financial liabilities has changed little over the past 20 years, although there has been important variations in the relative importance of mortgages (up then down) and consumer credit (down then up) during the interim period (see charts above and below).

Structure of US consumer credit (% total) over past 20 years
(Source: FED; CMMP)

What is the relationship with disposable personal income?

Trend in consumer credit / disposable personal income ratio (%)
(Source: FED; CMMP)

Consumer credit has also displayed a relative stable relationship with disposable personal income (DPI) over this period. The recent moderation in demand is consistent with the fact that the ratio was close to the upper end of its historic range at the end of 3Q22 (see chart above).

Trends in HH credit / disposable personable income ratio by type
(Source: FED; CMMP)

Mortgage demand, in contrast, has displayed a more volatile relationship with DPI over the period (see chart above). Indeed, the deleveraging of the HH sector in the post-GFC period is due almost exclusively to a reduction in mortgage indebtedness (see chart below). Consumer credit indebtedness is largely unchanged since the GFC.

Trends in HH credit / disposable personable income ratio by type
(Source: FED; CMMP)

Conclusion

Two key messages here:

  1. It is reasonable to assume that the demand for consumer credit will continue to moderate, putting pressure on consumption in the process
  2. Overall HH sector risks associated with the level of indebtedness and affordability of debt remain more manageable than in the pre-GFC period

Recall that the US led advanced economies in the structural shift away from relatively high-risk HH debt towards relatively low-risk public debt in the post-GFC period.

More elevated HH debt risks can be found elsewhere…

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

“Clues from consumer credit II”

An update from the US

The key chart

Trends in US monthly consumer credit flows (Source: FRED; CMMP)

The key message

US consumer credit demand remains strong in absolute and relative terms but the growth momentum is slowing. A key signal to watch in 4Q22 and beyond…

The US has seen 25 consecutive months of positive monthly consumer credit flows since August 2020. The latest data FED data point for September 2022 (published yesterday, 7 November 2022), showed a monthly flow of $26bn (3m MVA). This was 1.8x the average pre-COVID flow of $14.8bn. Comparable multiples for the euro area and UK were 0.6x and 1.0x average pre-COVID flows respectively, highlighting one reason for the relative strength of the US recovery.

In my previous post (before yesterday’s data release), I highlighted that US monthly flows had been more than double their pre-COVID average since March 2022 and suggested that, “the risks to the US growth outlook include the sustainability of current consumer credit demand.”

September broke this trend and while it is too early to draw definitive conclusions it is important to note the slowing growth momentum since April 2022 when monthly flows peaked at $37bn (3m MVA), 2.5x the pre-COVID average (see key chart above).

A key signal for 4Q22 and beyond…

Please note that these summary comments and the chart above are abstracts from more detailed analysis that is available separately.