1Q23 consumer credit flows still above pre-COVID levels
The key chart
Quarterly US and UK consumer credit flows expressed as a multiple of pre-pandemic average flows (Source: FRED; BoE)
The key message
Have US and UK consumers read the (recession) script?
Despite rising borrowing costs, quarterly consumer credit flows in 1Q23 remained well above pre-pandemic levels, helped by a recovery in monthly flows in March 2023. The message from the US and UK money sectors in 1Q23 was more positive for consumer demand and growth, but more problematic for Chair Powell and Governor Bailey…
US consumer credit totalled $65bn in 1Q23, down from $87bn and $84bn in 4Q22 and 3Q22 respectively but still 1.5x the pre-pandemic average quarterly flow of $45bn (see key chart above). The monthly flow in March 2023 rose to $27bn, from $15bn in February 2023, and was 1.8x the pre-pandemic average flow of $15bn or 1.5x on a 3m MVA basis (see chart below).
UK consumer credit totalled £4.7bn in 1Q23, up from £3.2bn and £3.3bn in $Q22 and 3Q22 respectively, and 1.3x the pre-pandemic average quarterly flow of £3.6bn (see key chart above). The monthly flow in March 2023 rose to £1.6bn, from £1.5bn in February 2023, and was 1.6x the pre-pandemic average of £1.2bn or 1.3x on a 3m MVA basis (see chart below).
Monthly consumer credit flows (3m MVA) expressed as a multiple of pre-pandemic average flows (Source: FRED; BoE)
The Federal Reserve and the Bank of England continue to face delicate balancing acts between reducing inflation (their core mandate) and weaker growth. Higher interest rates are supposed to deter borrowing and hence reduce aggregate demand and inflation. At the same, increased borrowing is one way that households can offset the pressures of falling real incomes.
In this context, the message from the US and UK money sectors in 1Q23 was more positive for consumer demand and growth, but more problematic for Chair Powell and Governor Bailey…
Please note that the summary comments and charts above are abstracts from more detailed research that is available separately.
What are US, EA and UK consumer credit flows telling us?
The key chart
Monthly CC flows as a multiple of pre-COVID averages (Source: FRED; ECB; BoE, CMMP)
The key message
Monthly consumer credit flows tell us a great deal about the relative strength of the US, euro area (EA), and UK economies and the risks associated with future growth.
The immediate response of US, EA and UK households to the pandemic was a consistent one – they all repaid consumer credit (i.e. negative monthly flows). The subsequent responses have been anything but consistent, however.
The US has seen 24 consecutive months of positive monthly consumer credit flows since August 2020. More significantly, these flows have been more than double their pre-COVID average since March 2022. This suggests that the risks to the US growth outlook include the sustainability of current consumer credit demand in the face of rising borrowing costs.
The EA has experienced more volatile monthly flows but the key message here is that monthly flows have yet to recover to their pre-COVID average. In contrast to the US, the risks to EA economic growth lie more in the lack of demand for consumer credit and on-going household uncertainty.
After two periods of consecutive negative monthly flows (March 2020-June 2020 and September 2020-February 2021), the UK has experienced 19 consecutive months of positive consumer credit flows. While the strength of the recovery here has been less than in the US, UK monthly flows have exceeded their pre-COVID levels since April 2022. The less-than-average monthly flow seen in September 2022, however, is a reminder that the risks to the UK economic outlook lie in demand for consumer credit stalling and household uncertainty returning.
Clues from consumer credit
Monthly consumer credit flows tell us a great deal about the relative strength of the US, EA, and UK economies and the risks associated with future growth.
The US
Trends in US monthly consumer credit flows (Source: FRED; CMMP)
In the US, pre-COVID monthly flows averaged $14.9bn. In the early stage of the pandemic, US households repaid consumer credit for three consecutive months between March and May 2020. Monthly flows turned positive in July 2020 before turning negative again in August 2020.
Since then, there have been 24 consecutive positive monthly flows (see chart above). The latest data point for August 2022, indicates that the 3m MVA of these flows was $32.7bn, 2.2x the average pre-COVID flow.
Monthly flows have been more than double the pre-COVID average since March 2022 suggesting that the risks to the US growth outlook lie in the sustainability of consumer credit in the face of rising borrowing.
The euro area
Trends in EA monthly consumer credit flows (Source: ECB; CMMP)
In the EA, pre-COVID monthly flows averaged €3.4bn. In the early stage of the pandemic, EA households also repaid consumer credit for three consecutive months between March and May 2020.
Monthly flows turned positive in April 2022 but the subsequent trend has been more volatile than that in the US (see chart above). The latest data point for September 2022 showed a monthly flow of €4.8bn, which was 1.4x the pre-COVID average. The 3m MVA of monthly flows, however, was €2.2bn, only 0.6x the pre-COVID average.
The 3m MVA of monthly flows has yet to recover to pre-pandemic levels suggesting that the risks to EA economic growth lie more in the lack of demand for consumer credit and on-going household uncertainty.
The UK
Trends in UK monthly consumer credit flows (Source: BoE; CMMP)
In the UK, pre-COVID monthly flows average £1.2bn. In the early stage of the pandemic, UK households repaid consumer credit for four consecutive months between March and June 2022 and then again for six consecutive months between September 2020 and February 2021.
Since then, there have been 19 consecutive months of positive monthly flows (see chart above). These flows (on a 3m MVA basis) have exceeded pre-COVID flows since April 2022.
The latest data point for September 2022, shows a monthly flow of £0.7bn (0.6x pre-COVID flows) and a 3m MVA of £1.2bn (slightly below pre-COVID flows). A reminder that the risks to the UK economic outlook lie in demand for consumer credit stalling and household uncertainty returning.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
