#reflation – Chris Mallin Macro Perspectives

“(Re-)fuelling challenges II”

Synchronised money cycles and messages from the UK and EA

The key chart

Broad money growth (% YoY) in UK and the euro area (Source: BoE, ECB; CMMP)

The key message

UK and euro area (EA) money cycles remain highly synchronised with the message from both region’s money sectors remaining one of “slowing momentum”.

At the start of 2021, I highlighted three key signals among these messages: are monthly HH deposit flows moderating; is consumer credit recovering; and are money and credit cycles re-synching with each other? The context here being that narrow money (M1) drove the expansion of broad money (M3) in both regions during the pandemic, reflecting the DEFLATIONARY forces of heightened uncertainty, increased (forced and precautionary) savings, reduced consumption and relatively subdued demand for credit.

While monthly flows of HH deposits are well below their respective peaks, they rose in both regions in August, notably in the UK where August’s flow was 2x pre-pandemic levels. Money sitting idly in overnight deposits contributes to neither growth nor inflation. Household uncertainly remains elevated and consumption muted (see also “Delaying the delayable”). Monthly consumer credit flows remain subdued in August and YoY growth rates were -2.4% in the UK and flat in the EA. Money and credit cycles remain out-of-synch with each other, presenting challenges to policy makers and investors alike and reminding us not to confuse current money cycles with previous versions. Furthermore, not only is private sector credit demand relatively subdued, it is also increasingly driven by FIRE-based lending (largely mortgages) rather than more productive COCO-based lending (largely NFC and consumer credit).

Economies and markets have benefitted from changing policy mixes that have been necessary and appropriate. Momentum in the key drivers of a sustained recovery is slowing, however, and further refuelling is required as we enter 4Q21.

Four charts that matter

**Monthly HH deposit flows as a multiple of average 2019 monthly flows** (Source: BoE; ECB; CMMP)

While monthly flows of HH deposits are well below their respective peaks, they rose in both regions in August, notably in the UK where August’s flow was 2x pre-pandemic levels (see chart above). Money sitting idly in overnight deposits contributes to neither growth nor inflation. Household uncertainly remains elevated and consumption muted.

**Annual growth in UK and EA consumer credit** (Source: BoE; ECB; CMMP)

Monthly consumer credit flows remain subdued in August and YoY growth rates were -2.4% in the UK and flat in the EA (see chart above).

**Lending growth minus money supply growth in the UK and EA** (Source: BoE; ECB; CMMP)

Money and credit cycles remain out-of-synch with each other (see chart above), presenting challenges to policy makers and investors alike and reminding us not to confuse current money cycles with previous versions.

**Growth rates in private sector credit by type** (Source: BoE; ECB; CMMP)

Furthermore, not only is private sector credit demand relatively subdued, it is also increasingly driven by FIRE-based lending (largely mortgages) rather than more productive COCO-based lending (largely NFC credit and consumer credit).

Conclusion

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

“(Re-)fuelling challenges”

Little to cheer in the message from the EA money sector

The key chart

**Real YoY growth rates in total lending and total minus HH lending** (Source: ECB; CMMP)

The key message

This morning’s message from the euro area (EA) money sector provided little cheer for those hoping for a refuelling boost to the region’s recovery/reflation narrative.

Broad money (M3) grew 7.9% YoY in August 2021, from 7.6% YoY in July 2021. However, with narrow money (M1) growing 11.1% YoY and contributing 7.8ppt to the total M3 growth, this marked the impact of deflationary forces rather than inflationary ones.

The monthly HH deposit flow (key signal #1) jumped to EUR51bn in August, from EUR23bn in July, and was 1.5x larger than pre-pandemic flows. Monthly consumer credit (key signal #2) fell to EUR0.1bn, in August from EUR2.0bn and EUR2.4bn in June and July respectively, leaving the YoY growth rate flat in nominal terms. Private sector credit growth slowed to 2.9% YoY in August from 3.1% YoY in July meaning that the gap between private sector credit and money growth (key signal #3) widened again to 5.0ppt in August from 4.6ppt in July – the money and credit cycles remain out-of-synch with each other.

Household credit grew 4.2% YoY in August and contributed 2.2ppt to the total 2.9% growth. Strip out HH lending, however, and private sector credit grew only 0.8% in nominal terms and fell -2.2% in real terms, the slowest rate of real growth since April 2014.

In short, it is not just the motorists queueing outside petrol stations today who are facing refuelling challenges –EA investors are too.

“Refuelling challenges” in six charts

**Growth in M3 (YoY %) and contribution on M1 (ppt)** (Source: ECB; CMMP)

Broad money (M3) grew 7.9% YoY in August 2021, from 7.6% YoY in July 2021. However, with narrow money (M1) growing 11.1% YoY and contributing 7.8ppt to the total M3 growth, this marked a return of deflationary forces rather than inflationary ones (see chart above).

**Monthly HH deposit flows as a multiple of average 2019 monthly flows** (Source: ECB; CMMP)

The monthly HH deposit flow (key signal #1) jumped to EUR51bn in August, from EUR23bn in July, and was 1.5 larger than pre-pandemic flows (see chart above). The key point here is that money sitting idly in overnight deposits contributes to neither growth nor inflation.

**Monthly consumer credit demand and annual YoY growth rate** (Source: ECB; CMMP)

Monthly consumer credit (key signal #2) fell to EUR0.1bn, in August from EUR2.0bn and EUR2.4bn in June and July respectively, leaving the YoY growth rate flat in nominal terms (see chart above).

**Growth in private sector credit** (Source: ECB; CMMP)

Private sector credit growth slowed to 2.9% YoY in August from 3.1% YoY in July (see chart above), meaning that the gap between private sector credit and money growth (key signal #3) widened again to 5.0ppt in August from 4.6ppt in July – the money and credit cycles remain out-of-synch with each other (see chart below) creating challenges for policy makers and investors alike.

**Growth in PS credit minus growth in broad money** (Source: ECB; CMMP)

Household credit grew 4.2% YoY in August and contributed 2.2ppt to the total 2.9% growth (see chart below). Strip out HH lending, however, and private sector credit grew only 0.8% in nominal terms and fell -2.2% in real terms, the slowest rate of real growth since April 2014 (see key chart above).

**Drivers of PSC growth by sector** (Source: ECB; CMMP)

In short, it’s not just the motorists queueing outside petrol stations today who are facing refuelling challenges – EA investors are too.

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

“Tough to get too excited”

Recovery and reflation trades require more substantial foundations

The key chart

**Growth in M3 (% YoY) and contributions (ppt) from M1 and PSC** (Source: ECB; CMMP)

The key message

It is tough to get too excited about the messages coming from the euro area’s (EA) money sector at the start of 3Q21.

Broad money growth is almost 5ppt lower than its January 2021 peak. The positive news here is that households are saving less, indicating that uncertainty levels have fallen. The less positive news is that growth in private sector credit has also fallen to its slowest rate since December 2017. Total lending is growing only 0.8% YoY in real terms and is falling -1.3% YoY in real terms if we exclude lending to HH (mainly mortgages).

In short, while the message from the money sector remains positive for (already overvalued) house prices in the euro area, the wider message is that both a sustained recovery and reflation trades require a more substantial foundation.

The six charts that matter

**Growth in EA broad money % YoY** (Source: ECB; CMMP)

It is tough to get too excited about the messages coming from the euro area (EA) money sector at the start of 3Q21. Growth in broad money (M3) slowed to 7.6% YoY in July 2021, almost 5ppt below the January 2021 recent high of 12.5% (see chart above). The positive news is that this reflects a reduction in the deflationary forces that drove M3 growth during the pandemic.

**YoY growth rates in M3 and M1 since 2001** (Source: ECB; CMMP)

Narrow money (M1) which contributed 7.7ppt to the total 7.6% YoY M3 growth has slowed from 16.5% in January 2021 to 11.0% in July 2021 (see chart above). In short, EA households are saving less.

**Monthly flows (EUR bn) of HH deposits during phases of pandemic** (Source: ECB; CMMP)

Overnight deposits still account for 6.8ppt of total M3 growth, but in aggregate household monthly deposit flows fell to €23bn in July 2021, below the 2019 average monthly flow of €33bn and the smallest monthly flow since June 2019 (see chart above).

**Growth in PSC (% YoY 3m MVA) since 2001** (Source: ECB; CMMP)

The less positive news is that credit demand is also slowing. Private sector credit contributed only 3.5ppt to M3 growth and the YoY growth rate slowed to 2.9% YoY (3MVA) the slowest growth since December 2017 (see chart above).

**Trends in growth in lending and contribution from lending x HH** (Source: ECB; CMMP)

As noted in “Strip out HH lending”, current lending is predominantly less-productive FIRE-based lending rather than productive COCO-based lending. Total lending grew 0.8% YoY in real terms in July, but fell -1.3% YoY in real terms excluding HH lending (see chart above). HH lending contributed 2.2ppt to the total 3.1% nominal growth in lending in July 2021 (see chart below).

**Drivers of PSC growth** (Source: ECB; CMMP)

Conclusion

In summary, while the message from the money sector remains positive for (already overvalued) house prices in the euro area, the wider message is that both a sustained recovery and reflation trades require a more substantial foundation.

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

“The UK reflation trade needs refuelling”

Direction versus pace of travel…

The key chart

**Trends in weekly card payments versus pre-COVID levels** (Source: ONS; CMMP)

The key message

In April 2021, I argued that investment narratives, like endurance athletes, require constant refuelling but that it was too early to expect much “refuelling” in terms of the key signals for 2021. This has been true for the UK where the direction of travel has been positive but the pace of travel has been disappointing in relation to trends observed in the euro area (EA).

Monthly flows in household (HH) money, a useful indicator of household uncertainty, have followed the timing of lockdown restrictions closely. They have fallen from £21bn in December 2020 to £7bn in May 2021 but remain 1.5x the average pre-COVID pandemic monthly flows.

CMMP analysis suggests that “excess savings” built up during the pandemic have reached £144bn (slightly below official estimates) or £137bn if a slightly higher level of precautionary savings are maintained. History reminds us that it takes time for excess savings or unanticipated sources of wealth to return in the form of consumption, however. For the first time since August 2020, UK consumers borrowed more than they paid off in May 2020 (£0.3bn) but the annual growth rate remained weak (-3.2% YoY).

So-called “faster indicators” such as UK spending on debit and credit cards send the same message. Spending continues to recover but remains below pre-pandemic levels. UK HHs are increasing spending on getting to work but spending on “delayable” goods has lost some momentum and remains below pre-COVID levels. This morning (9 July 2020), ONS statistics show GDP growing 0.8% in May 2021, the fourth consecutive month of growth, but below expectations and 3.1% below pre-COVID levels.

The UK reflation trade is in need of more sustained refuelling…