UK spending recovery is steady rather than dramatic
The key chart
Aggregate credit and debit card purchases versus February 2020 (pre-COVID) average (Source: ONS; CMMP)
The key message
ONS real-time indicators continue to point to a steady recovery in UK credit and debit card purchases but may disappoint those hoping for a rapid recovery in consumption.
The charts that matter
Aggregate card purchases fell from 106% of average February 2020 spending (pre-Covid) on 5 May 2021 to 95% on 27 May 2021 (see key chart above). Spending on so-called “delayable” and “staple” goods also fell during May (MTD). In contrast, “social” spending rose from 76% to 85% and “work-related” spending increased from 100% to 104%.
May 2021 versus the start of the year – a recovery across the board (Source: ONS; CMMP)
Spending across all categories is higher in relation to pre-COVID levels than in January 2021 but only staples and work-related spending are above pre-COVID levels (see chart above).
CMMP estimates of excess HH savings built up during the COVID-19 pandemic (Source: CMMP)
Spending on delayable goods (eg, clothing, furniture) is a useful indicator of the extent to which the c.£160bn of excess savings built up during the pandemic (see chart above) is returning to the economy via consumption.
Recovery in delayable spending has lost momentum (Source: ONS; CMMP)
These purchases recovered strongly following the reopening on non-essential stores (12 April) to reach recent highs of 122% (19 April) and 112% (5 May) of pre-COVID spending. Momentum has slowed since then, however, with the latest data indicating delayable spending at 91% of pre-COVID levels (see chart above).
Change in index of card purchases YTD (Source: ONS; CMMP)
It is reasonable to expect volatility in faster-indicators and dangerous, therefore, to draw too many conclusions from short-term movements. The core message remains that the consumption is recovering but at a steady rather than rapid pace. Unsurprisingly, the strongest recovery YTD has been in work related spending (see chart above).
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
Broad money (M3) rose 12.3% YoY across the euro area (EA) in February 2021, down slightly from the 12.5% and 12.4% growth rates recorded in January 2021 and December 2020 respectively. Narrow money (M1) grew 16.4% YoY, versus 16.5% in January, and contributed 11.3ppt to overall money growth. Overnight deposits, the key component of M1, rose 17.0% YoY and contributed 10.1ppt to overall money growth alone.
In relation to three key signals framework introduced early this year that look for (1) a moderation in monthly deposit flows, (2) a re-synching of money and credit cycles, and (3) a recovery in consumer credit – there is little change to report in these numbers:
Households placed €53bn in deposits in February, down from €61bn in January but in-line with the €54bn deposited in January. February’s monthly flow is still 1.6x the average monthly flows recorded in 2019 indicating that the preference for holding highly-liquid assets and household uncertainty levels remain high
Money and credit cycles remain out-of-synch. Private sector credit grew 4.5% YoY in February, unchanged from January, but 7.8ppt slower than the 12.3% growth in broad money. This is the second highest gap between credit growth and money growth after last month’s 8ppt. Note that from a counterparts perspective, credit to the private sector contributed only 5.3ppt to broad money growth versus 8.6ppt from credit to general government.
Consumer credit remains weak. While the monthly flow of consumer credit was a positive €2bn, versus net repayments of €3bn in January, the YoY grow rate fell to a new low of -2.8%.
So no change in the messages from the money sector. Household uncertainty and liquidity preference remains elevated, money and credit cycles remain out-of-synch and consumer credit continues to weaken.
Little cheer yet for investors positioned for an upturn in EA inflation.
Look beyond the headines and a different story emerges
The key chart
Growth in broad money (% YoY) since 1981 (Source: ECB; CMMP)
The key message
Inflation hawks in the euro area may cheer January’s record 12.5% YoY growth in broad money, but doves will take comfort from what is happening behind the headlines.
There is no sign of a moderation in household (HH) monthly deposit flows – January’s flows (€60bn) remain almost 2x the 2019 average and money sitting idly in savings accounts contributes to neither GDP nor inflation (n.b. growth in overnight deposits contributed 10.1ppt to overall money growth)
The gap between the money and credit cycle widened to a new high of 8.1ppt compared with 1.5ppt a year earlier. Credit demand remains subdued, despite the low cost of borrowing, while money supply accelerated. This is not a typical cycle
Finally, the region’s HHs have paid down consumer credit in four of the past five months. January’s -2.5% YoY change in consumer credit was the weakest level since February 2014
There is nothing in today’s data to change the pre-existing narrative. At the end of January, the score is 3:0 to the doves.
Three key charts for 2021 revisited
Inflation hawks in the euro area may cheer January’s record growth in broad money. M3 grew 12.5% YoY in January, from 12.4% in December 2020 and 11.0% in November 2020. This is the fastest rate of growth in the ECB’s current data series extending back to 1981 (see key chart above) and matches the previous peak level recorded in October and November 2007. Growth in narrow money (M1) also hit a new high (16.4% YoY) and contributed 11.3ppt to the total growth in M3. Within M1, overnight deposits grew 17.1% YoY and contributed 10.1ppt to the total growth in M3 alone. At this point, inflation hawks might begin to wonder…
Inflation doves, in contrast, will take comfort from what is happening behind the headlines. Earlier this month, I suggested that there were three key signals among the messages from the money sector to look for in 2021:
First, a moderation in monthly deposit flows
Second, a re-synching of money and credit cycles
Third, a recovery in consumer credit
Key signal #1
Monthly flows of HH deposits as a multiple of the 2019 average monthly flow (Source: ECB; CMMP)
Euro area HHs deposited €60bn in January, 1.8x the average 2019 monthly flow of €33bn. In the past three months, HH monthly flows have increased by €61bn (1.9x), €52bn (1.6x) and €60bn (1.8x) suggesting that HH uncertainty levels remain elevated. NFC monthly deposits of €22bn in January were also 1.7x their respective 2019 average. The key point here is that money sitting idly in savings accounts contributes to neither GDP nor inflation.
Key signal #2
Growth (% YoY) in private sector credit minus growth in M3 (Source: ECB; CMMP)
The gap between the money and credit cycle widened even further in January. Private sector credit (a key counterpart to M3) grew by 4.4% YoY on an adjusted basis, down from 4.7% in December, and contributed only 5.4ppt to the growth in broad money (versus 5.7ppt in December). The difference between the growth in lending and the growth in money supply is now a new record of 8.1ppt. This compares with 1.5ppt a year earlier. Note that, in typical cycles, monetary aggregates and their counterparts move together. Money supply indicates how much money is available for use by the private sector. Private sector credit indicates how much the private sector is borrowing. The key point here is that credit demand remains relatively subdued, despite the low cost of borrowing, while money supply has accelerated. This is not a typical cycle.
HHs repaid €2.5bn in consumer credit in January 2021 and the YoY growth rate fell to -2.5%, the weakest level since February 2014. Recall that consumer credit represents one section of COCO-based lending. It supports productive enterprise since it drives demand for goods and services, hence helping NFCs to generate sales, profits and wages. With HHs hoarding cash and lockdown measures remaining in place, weakness in consumer credit is not unexpected.
Conclusion
While inflation hawks may cheer accelerating growth in EA broad money, doves will correctly look beyond the headlines to note that HHs remain uncertain and continue to hoard cash, the gap between the money and credit cycle has widened even further and consumer credit trends remain weak. As yet, there is nothing in the messages from the money sector, to change the pre-existing narrative. At the end of January, the score is 3:0 to the doves.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available seperately.
And the trends that investors SHOULD be looking for…
The key chart
Growth rates (% YoY) in UK and EA broad money aggregates (Source: BoE; ECB; CMMP)
The key message
Should investors positioned for an upturn in inflation and sustained outperformance from cyclical and value plays and/or shorter duration trades be hoping for stronger or weaker money supply growth in the UK and EA in 2021?
Contrary to the popular narrative, the answer is likely to be the latter not the former. In this post, I summarise why this is the case and highlight the three key charts to follow in 2021.
Over the past decade, we have witnessed a sustained shift in the components of broad money supply (M3) with greater contribution coming from holdings of the most liquid assets ie, narrow money (M1). The reaction of UK and EA households to the COVID-19 pandemic has accelerated this trend, as levels of forced and precautionary savings have risen sharply, particularly in the UK.
The challenge for inflation hawks here is that money sitting idly in savings accounts contributes to neither GDP nor inflation.
Analysis of the counterparts of monetary aggregate highlights the extent to which money and credit cycles are diverging in both regions. Within subdued overall levels of private sector credit demand, relatively robust NFC credit and resilient mortgage demand offset weakness in consumer credit during 2020. Weakness in consumer credit was more noticeable in the UK, where net repayments of £17bn made 2020 the weakest year for consumer credit on record.
There are three key signals among the messages from the money sector in 2021 to look for:
First, a moderation in monthly deposit flows
Second, a re-synching of money and credit cycles
Third, a recovery in consumer credit.
Trends in 2020, suggest that the UK has a relatively high gearing to each of these trends.
The charts that mattered in 2020
Share of narrow money in UK and EA broad money since 2010 (Source: ECB; BoE; CMMP)
Over the past decade, we have witnessed a sustained shift in the components of broad money supply (M3) with greater contribution coming from holdings of the most liquid assets ie, narrow money (M1). At the end of 2010, M1 accounted for 46% and 51% of M3 in the UK and EA respectively. By the end of 2020, these shares had risen to 67% and 71% respectively (see chart above).
In other words, changes in holdings of notes and coins and overnight deposits are having a greater impact on the behaviour of money supply. As noted in, “The yawning gap”, for example, M1 contributed 10.7ppt to the 12.3% growth in EA M3 in 2020.
Monthly flows of HH money in the UK (Source: BoE; CMMP)
The reaction of UK and EA households to the COVID-19 pandemic has accelerated this trend, as levels of forced and precautionary savings have risen sharply.
The first COVID-related death in the UK was recorded on 5 March 2020 and the first lockdown began 18 days later on the 23 March 2020. UK households increased their money holdings by £14bn, £17bn and £27bn in March, April and May 2020 respectively. This £58bn increase in holdings was greater than the total flow of £55bn recorded in 2019. Households began to increase then money holdings sharply again in October 2020, even though the second lockdown did not come into effect until 5 November 2020. In the last three months, UK households increases their money holdings by £13bn, £18bn and £21bn (£52bn in total), 3-4x the average monthly flows in 2019 (see chart above).
Monthly flows of HH deposits in the EA (Source: ECB; CMMP)
Similar household behaviour was seen in the euro area albeit with slightly different timings and scale. In the early stage of the pandemic, household deposits increased by €78bn and €75bn in March and April 2020 respectively, more than double the average 2019 monthly flows. In November and December 2020, monthly flows increased again to €61bn and €53bn (see chart above).
The challenge for inflation hawks here is that money sitting idly in savings accounts contributes to neither GDP nor inflation.
Growth in private sector credit minus growth in money supply in the UK and EA (Source: BoE; ECB; CMMP)
Analysis of the counterparts of monetary aggregate highlights the extent to which money and credit cycles are diverging in both regions. As noted last month, in typical cycles, monetary aggregates and their key counterparts move together. Money supply indicates how much money is available for use by the private sector. Private sector credit indicates how much the private sector is borrowing.
At the end of 2019, the gap between the growth in lending and the growth in money supply was 0.6ppt and -2ppt in the UK and EA respectively. By the end of 2020, these gaps had widened to record levels of -9.9pt and -7.6ppt (see chart above). Simply put, credit demand has remained relatively subdued in both regions, despite the low cost of borrowing, while money supply has accelerated.
Trends in NFC credit, mortgages and consumer credit since 2018 (Source: BoE; ECB; CMMP)
Within subdued overall levels of private sector credit demand, relatively robust NFC credit and resilient mortgage demand offset weakness in consumer credit during 2020 in both regions (see chart above). The YoY growth in NFC credit in the UK increased from 3.3% in 2019 to 7.7% in 2020. Similarly, the respective growth rates in the EA increased from 3.2% in 2019 to 7.0% in 2020. Mortgage growth in the UK moderated slightly from 3.4% in 2019 to 3.0% in 2020 but rose from 3.9% in 2019 to 4.7% in 2020 in the EA. Consumer credit grew 6.1% and 6.0% in the UK and EA in 2019 respectively, but fell 7.5% and 1.6% in 2020 respectively.
2020 monthly trends in HH consumer credit in the UK (Source: BoE; CMMP)2020 monthly trends in HH consumer credit in the EA (Source: ECB; CMMP)
The weakness in consumer credit was more significant in the UK than in the EA. Net repayments of £17bn made 2020 the weakest year for consumer credit on record. UK households repaid consumer credit in the last four months of 2020 and the annual growth rate of minus 7.5% represented the weakest rate of growth since the series began in 1994 (see first of the charts above). EA households also repaid consumer credit in three of the last four months of 2020, but the YoY decline of minus 1.6% was more moderate than in the UK.
Conclusion and three charts to watch in 2021
A sustained upturn in inflation and outperformance from cyclical and value sectors and shorter duration trades will require confidence, consumption and investment to return fully. There are three key signals to look for in the messages from the UK and EA money sectors in 2021.
Monthly deposit flows as a multiple of the 2019 monthly average (Source: BoE; ECB; CMMP)
First a moderation in monthly deposit flows, especially by the household sector, and slower growth in narrow money (M1) and hence broad money (M3).
The yawing gap between money supply and private sector credit demand (Source: BoE; ECB; CMMP)
Second, a re-synching of money and credit cycles with a corresponding rebalancing in the counterparts of broad money growth.
Trends in YoY growth rates for UK and EA consumer credit (Source: BoE; ECB; CMMP)
Third, and finally, a recovery in consumer credit. Consumer credit represents one section of COCO-based lending (see “Fuelling the FIRE”). Its supports productive enterprises since it drives demand for goods and services, hence helping NFCs to generate sales, profits and wages.
The relative scale in the shift of money holdings and weakness in consumer credit suggests that the UK has a higher gearing than the EA to a reversal of 2020’s COVID-19 induced dynamics. Watch this space in 2021…
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.
Trends in UK M4ex – is this a different form of monetary expansion? (Source: Bank of England, CMMP analysis)
“Money sitting idle in a savings account does not contribute to GDP”
Dirk H. Ehnts, Modern Monetary Theory and European Macroeconomics
The key message
UK money supply (M4ex) increased 13.9% YoY in November 2020. Does this mean that investors positioned for a pick-up in UK inflation should be getting excited?
No, not yet (if at all).
As mentioned in previous posts, the message from the money sector is very different now from previous periods of rising money supply. The key 2020-21 messages remain:
heightened household uncertainty
weak household consumption
subdued overall credit demand
None imply ST inflationary pressures.
Household uncertainty – the chart that matters
Monthly flows in UK households sterling money holdings in £bn (Source: Bank of England; CMMP analysis)
Household M4 accounts for 64% of total M4ex. In November 2020, UK households increased their sterling money holdings by £17.6bn, up from £9.4bn in October. This represents the second highest monthly flow after May 2020’s £25bn and was almost 4x the size of the average monthly flow in 2019. Uncertainty reigns in the UK household sector.
Weak household consumption – the chart that matters
Monthly flows in UK consumer credit in £bn – a negative figure indicates net repayments (Source: Bank of England; CMMP analysis)
Households also made net repayments in consumer credit for three consecutive months between September and November 2020 of £0.8bn, £0.7bn, and £1.5bn respectively. The -6.7% YoY decline in consumer credit in November was the weakest level since the series began in 1994.
Subdued credit demand – the charts that matter
YoY growth rates in the BoE’s headline money (M4) and credit (M4 Lending) series – out of synch! (Source: Bank of England; CMMP analysis)YoY growth rate in lending minus YoY growth rate in money – abnormal money and credit cycles (Source: Bank of England; CMMP analysis)
Finally, the gap between growth in M4 (13.9%) and ML lending (4.5%) remains at a record high of 9.4ppt. In other words, this is not a normal cycle with synchronised money and credit trends (albeit with traditional leading and lagging relationships). Consequently, and with credit demand remaining subdued, investors should be wary of assuming normal relationships between money supply and inflation (to the extent that such relationships exist at all).
Conclusion
“Monetary policy effectiveness is based on certain stable relationships between monetary aggregates.”
Richard Koo, The Holy Grail of Macroeconomics
To repeat the penultimate lesson from the money sector in 2020 – periods of monetary expansion differ in terms of their drivers and implications. The message in the pre-GFC period was one of over-confidence and excess credit demand. In contrast, the current message is one of elevated uncertainty, weak consumer demand and subdued overall credit demand (with the added uncertainty regarding the extent to which rising savings are forced or precautionary).
It is too early for UK investors who are positioned for a pick-up in inflations to get excited.
[Note that this post was drafted before the announcement of further UK lockdown restrictions on 4 January 2020]
Please note that the summary comments above are extracts from more detailed analysis that is available separately.
