…Subdued (EA) and slowing (UK) demand for consumer credit
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.
Synchronised slowdowns in monthly UK and EA mortgage flows are accelerating
The key chart
Monthly mortgage flows (3m MVA) as a multiple of pre-pandemic average flows (Source: BoE; ECB; CMMP)
The key message
Current trends in the euro area (EA) and UK mortgage markets provide little cheer for investors hoping for a growth recovery in the regions.
The synchronised slowdown highlighted last month accelerated further in December 2022. Monthly mortgage flows have fallen below their respective pre-pandemic averages in both cases. The rate of slowdown is particularly sharp in the EA.
Given that mortgage demand typically displays a co-incident relationship with real GDP, the message from the UK and EA money sectors is one of rising risks to the economic outlook – the challenging context for central bank decisions this week.
Monthly mortgage flows – the key trends
Monthly mortgage flows have fallen below their pre-pandemic levels in both regions (see key chart above). The 3m MVA of monthly mortgage flows in the EA (€7.2bn) has fallen to only 0.58x the pre-pandemic flow (€12.5bn). In the UK, the 3m MVA of mortgage flows (£3.7bn) fell to 0.95x the pre-pandemic flow (£3.9bn). This was the first time that the UK’s monthly mortgage flow has fallen below its pre-pandemic average since December 2021.
The rate of slowdown in mortgage lending flows is particularly sharp in the EA. Flows have fallen from €26bn in June 2022 (2.02x pre-pandemic average) to €7bn in December 2022 (0.58x pre-pandemic average). This compares with respective multiples of 1.32x (June) and 0.95x (December) for UK mortgage flows.
Monthly mortgage flows – the UK details
Monthly mortgage flows (£bn) and annual growth rate in outstanding stock (RHS) (Source: BoE; CMMP)
Monthly UK mortgage flows fell to 3.2bn in December 2022 down from £4.3bn in November 2022 (see chart above). December’s flow was only 0.83x the pre-pandemic average flow of £3.9bn and below the recent March 2022 peak of £7.5bn (1.9x pre-pandemic flows).
Approvals for house purchase, and indicator of future borrowing, decreased to 35,600 in December 2022 from 46,200 in November. The latest approvals were the lowest since May 2022 and represent the fourth consecutive month of declines. It is reasonable, therefore, to expect lower UK flows in coming months.
Monthly mortgage flows – the EA details
Monthly EA mortgage flows (EUR bn) and annual growth rate in outstanding stock (RHS) (Source: ECB; CMMP)
Monthly EA mortgage flows fell to €4.5bn in December 2022 from €8.9bn in November and €30.1bn in June 2022 (see chart above). December’s flow was only 0.4x the pre-pandemic average of €12.6bn and was the lowest monthly flow since March 2020 (€3.8bn) at the start of the pandemic.
Monthly mortgage flows – why the slowdown matters
Given that mortgage demand typically displays a co-incident relationship with real GDP, the message from the UK and EA money sectors is one of rising risks to the economic outlook – the challenging context for central bank decisions this week.
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
EA and UK money sectors sending cautious consumption messages
The key chart
Monthly consumer credit flows as a multiple of pre-pandemic average flows (Source: BoE; ECB; CMMP)
The key message
Monthly consumer credit flows in the euro area (EA) and the UK bounced slightly in October 2022 but momentum appears to be weakening. The regions’ money sectors are sending cautious messages about the outlook for consumption and growth.
Monthly EA consumer credit flows as a multiple of pre-pandemic average flows (Source: ECB; CMMP)
In the EA, the monthly flow of consumer credit was €2.4bn in October 2022, up from €1.9bn in September 2022. (Note that September was revised down from €4.8bn previously). This flow was only 0.7x the pre-pandemic average of €3.4bn. The 3m MVA of monthly flows was €1.4bn, only 0.4x its pre-pandemic average. Smoothed monthly flows have yet to recover to pre-pandemic levels, confirming that risks to EA economic growth lie in the lack of demand for consumer credit.
Monthly UK consumer credit flows as a multiple of pre-pandemic average flows (Source: BoE; CMMP)
In the UK, the monthly flow of consumer credit was £0.8bn in October 2022, up from £0.6bn in September 2022. This flow was only 0.6x the pre-pandemic average of £1.2bn, however. The 3m MVA of monthly flows was £0.9bn, only 0.7x its pre-pandemic average. Last month I suggested that the risks to the UK economic outlook lay in demand for consumer credit stalling. This remains the case.
In the face of falling real disposable incomes, EA and UK households have the option to reduce consumption, reducing their rates and/or stock of savings, and/or borrow more.
Given that excess savings typically accrue to HHs with relatively low marginal propensities to consume, the flow of consumer credit becomes an important indicator in terms of the relative strength of the EA and UK economies and the risks to future growth.
With momentum slowing here, the downside risks are mounting in both regions.
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
Inflation distorts the 2Q22 messages from the money sector
The key chart
Nominal and real growth rates in EA private sector credit (Source: ECB; CMMP)
The key message
Rising inflation distorts the 2Q22 messages from the euro area’s (EAs) money sector significantly.
Ignore inflation and the three key signals that I have been following consistently since early 2021 are all sending broadly positive messages for the region’s economic outlook. Monthly household (HH) deposit flows have moderated sharply, reflecting lower levels of uncertainty. The demand for consumer credit has recovered with the largest quarterly flows since the recovery began in 2Q21. Growth rates in money supply and private sector credit have also re-aligned as money and credit cycles have re-synched with each other. Finally, the contribution of productive COCO-based lending has increased, with growth in lending to corporates (NFCs) outstripping mortgage growth in June 2022. So far, so good.
Take inflation into account and the messages are very different, however. Private sector credit (PSC) is slowing in real terms (-2.3% YoY). With the exception of lending to non-monetary financial corporations (8% of total PSC), the growth rates in all forms of PSC are declining in real terms. Furthermore, trends in real M1, real HH credit and real NFC credit are all slowing sharply in a coordinated manner. This matters because these factors typically display leading, coincident and lagging relationships with real GDP.
Plenty of information for optimists and pessimists to debate but with increasing ammunition for the pessimists…
Accounting for inflation
Rising inflation distorts the 2Q22 messages from the euro area’s (EAS) money sector significantly.
The good news
Ignore inflation and the messages are broadly positive for the region’s economic outlook.
Trends in monthly HH deposit flows (Source: ECB; CMMP)
Monthly HH deposit flows have moderated sharply, reflecting lower levels of uncertainty. The monthly flow fell to €9bn in June 2022 (see chart above). This is well below the average pre-pandemic flows of €33bn and the peak flow of €78bn in April 2020 when HH uncertainty levels peaked at the height of the pandemic crisis.
Quarterly trends in HH deposit flows (Source: ECB; CMMP)
The quarterly HH deposit flow in the 2Q22 was €53bn (see chart above). This compares with average quarterly pre-pandemic flows of €90bn. The message here is the same – HHs in the EA are no longer hoarding cash in the form of bank deposits. This is reflected, in turn, in the slowdown in broad money growth (see below).
Trends in monthly consumer credit flows (Source: ECB; CMMP)
The demand for consumer credit has recovered. Monthly consumer credit flows slowed from €2.4bn in April 2022 and €3.3bn in May 2022 to €1.8bn in June 2022 (see chart above). The YoY growth rate of 3.3% was the second highest rate of growth since consumer credit recovered in April 2021, however (after May 2022’s 3.4% YoY).
Quarterly trends in consumer credit (Source: ECB; CMMP)
The quarterly flow of consumer credit in 2Q22 of €7bn was the largest quarterly flow since the recovery started in 2Q21. There have now been five consecutive quarters of positive consumer credit flows (see chart above), albeit these flows remain below the pre-pandemic levels.
Growth trends in broad money (M3) and private sector credit (Source: ECB; CMMP)
After the recent unprecedented de-synchronisation of money and credit cycles, growth rates in EA money supply and private sector credit have now converged (see chart above).
The YoY growth rate in broad money (M3) fell to 5.7% in June 2022, the slowest rate of growth since February 2020. In contrast, the growth rate in private sector credit rose to 6.1% YoY, the fastest rate of growth since private sector credit growth turned positive in Mach 2015.
Recall that in January 2021, the gap between the growth rate in M3 and the growth rate in private sector credit was 8ppt. In June 2022, private sector credit grew faster than broad money, suggesting that the period of excess liquidity (see green shaded area in graph above) may be ending.
Trends in PSC and contribution from COCO-based lending (Source: ECB, CMMP)
The contribution of productive COCO-based lending is also increasing with the growth in lending to corporates (NFCs) outstripping the growth in mortgages. COCO-based lending contributed 2.5ppt to the total (unadjusted) growth rate in private sector credit of 5.8% (see chart above). This compares with a contribution of only 0.6ppt a year earlier.
Less productive FIRE-based lending is still contributing more (3.3ppt) than COCO-based lending to total loan growth, but corporate lending is now growing faster (5.9% YoY) than mortgage lending (5.3% YoY). Corporate and mortgage lending represent the largest segments of COCO-based and FIRE-based lending respectively.
Growth trends (% YoY, nominal) in mortgages and NFC lending (Source: ECB; CMMP)
The bad news
Nominal and real growth rates in EA private sector credit (Source: ECB; CMMP)
Take inflation into account and the messages are very different, however. PSC is growing 6.1% YoY in nominal terms, the fastest rate of growth since January 2009. In real terms, however, PSC is falling -2.3% YoY. With the exception of lending to non-monetary financial corporations (8% of total PSC), the growth rates in all forms of PSC are declining in real terms.
Growth trends (% YoY, real terms) in M1, HH credit and NFC credit (Source: ECB; CMMP)
Furthermore, trends in real M1, real HH credit and real NFC credit are all slowing sharply in a coordinated manner. This matters because these factors typically display leading, coincident and lagging relationships with real GDP over time. (See “Look beyond the yield curve” for more details about these indicators)
Conclusion
The three key signals from the money sector that we have been following consistently since early 2021 are all sending broadly positive messages – HHs have stopped hoarding money, they are borrowing more to fund consumption, and money and credit cycles are re-synching. The on-going recovery in productive COCO-based lending is also positive.
Rising inflation is over-taking these positive trends, however. PSC is falling in real terms and traditional leading, coincident and lagging monetary indicators have turned down sharply and in a coordinated fashion. Plenty of ammunition here for pessimists…
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
