#threekeysignals – Chris Mallin Macro Perspectives

“Completing the transition”

The end of “pandemic-era” economics

The key chart

**Growth rate in M3 (% YoY) and contribution (ppt) of M1 and private sector credit**
(Source: ECB; CMMP)

The key message

Monetary developments in the euro area (EA) indicate a clear transition away from “pandemic-era” economics.

Growth rates in broad money (M3) recovered during 3Q22 but remained well below pandemic levels. Three important, positive developments lay behind the headline growth figures.

First, the period of heightened uncertainty and subdued demand for credit that reached a peak during the pandemic has ended.
Second, and following on from this, EA money and credit cycles are re-synching with each other as the demand from credit recovers to levels last seen in December 2008.
Third, and perhaps most importantly, the breakdown of private sector credit is shifting back towards increased demand for productive (COCO-based) lending – corporate credit is accelerating while mortgage demand is moderating slowly.

So far, so good.

Rising inflation is outweighing each of these positive developments, unfortunately.

Monetary trends adjusted from inflation, are sending very different and consistently negative messages. Real growth rates in M1, HH credit and NFC credit typically display leading, coincident and lagging relationships with real GDP. Each indicator is falling at an increasing rate.

If historic relationships between these variables continue, this suggests a deceleration in overall economic activity over the next quarters.

Completing the transition

Monetary developments in the euro area (EA) indicate a clear transition away from “pandemic-era” economics.

**Growth rates (% YoY) in broad (M3) and narrow (M1) money**
(Source: ECB; CMMP)

Growth rates in broad money (M3) recovered during 3Q22 but remained well below pandemic levels. M3 rose 6.3% YoY in September, up from 6.1% YoY in August and 5.7% YoY in July. Despite this, broad money growth was 6.2ppt below its 12.5% YoY January 2021 peak (see chart above).

Narrow money (M1), a key component of broad money, rose only 5.6% YoY, however, down from 6.8% YoY in both August and July. Narrow money growth was 10.9ppt below its 16.5% YoY January 2021 peak.

Behind the headline YoY growth figures lie three important, positive developments.

**Growth rate (% YoY) in M3 and contribution (ppt) of ON deposits and other components**
(Source: ECB; CMMP)

First, the period of heightened uncertainty and subdued demand for credit that reached a peak during the pandemic has ended. Recall that the hoarding of cash by HHs and NFCs, largely in the form of overnight deposits at banks, was the main driver of the spike in broad money during the pandemic (see graph above). M3 growth peaked at 12.5% YoY in January 2021. At the same time, M1 and overnight deposits grew 16.5% YoY and 17.1% YoY and contributed 11.3ppt and 10.1ppt to total broad money growth respectively.

With heightened levels of uncertainty, HHs were increasing their forced and precautionary savings. The key point here is that money sitting idly in overnight deposits at banks contributed to neither economic growth nor inflation.

**Growth rate (% YoY) in M3 and contribution (ppt) of private sector credit**
(Source: ECB; CMMP)

Note also, that at the point of maximum M3 growth, private sector credit grew only 4.5% YoY and contributed only 5.4ppt to the 12.5% YoY growth in broad money (see graph above).

Fast forward to September 2022, and private sector credit grew 6.9% YoY in September, up from 6.8% YoY in August and 6.3% YoY in July. At the end of 3Q22, private sector credit contributed 5.4ppt to the total 6.3% YoY growth rate in broad money. This represents a clear break from the monetary dynamics seen during the pandemic (see key chart above).

**Growth rates (% YoY) in M3 and private sector credit**
(Source: ECB; CMMP)

Second, and following on from this, EA money and credit cycles are re-synching with each other as the demand from credit recovers to levels last seen in December 2008.

As noted in “Don’t confuse the messages”, monetary aggregates and their counterparts move together in typical cycles. 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.

**Growth rate (% YoY) in private sector credit minus growth rate in M3**
(Source: ECB; CMMP)

The “pandemic-era” relationship between money and credit cycles was far from typical, however. In January 2021, the gap between the YoY growth rate in M3 (12.5% YoY) and private sector credit (4.5% YoY) reached a historic high of 8ppt (see chart above).

During 2021, CMMP analysis focused on this dynamic as one of the three key signals to monitor. In September 2022, private sector credit grew faster (6.9% YoY) than money supply (6.3% YoY) for the fourth consecutive month as money and credit cycles re-synched with each other.

**Trends in the outstanding stock of private sector credit (EUR bn) with breakdown between COCO-based and FIRE-based lending** (Source: ECB; CMMP)

Third, and perhaps most importantly, the breakdown of private sector credit is shifting back towards increased demand for productive (COCO-based) lending – corporate credit is accelerating while mortgage demand is moderating slowly.

Recall that the outstanding stock of loans that support production and income formation in the euro area (COCO-based loans) only recovered to the GFC period peaks in November 2021 (see chart above). Nearly all of the aggregate growth in euro area lending since the GFC has been in the form of less-productive FIRE-based lending (see “Fuelling the FIRE” and “It’s a record of sorts”).

**Growth (% YoY) in PSC and contribution (ppt) of COCO-based and FIRE-based lending**
(Source: ECB; CMMP)

In September 2022, COCO-based and FIRE-based lending both contributed 3.3ppt to the total 6.6% YoY growth in (unadjusted) private sector credit (see graph above). This contrast sharply with the situation a year earlier in September 2021 when COCO-based and FIRE-based lending contributed 0.7ppt and 2.5ppt to the total 3.2% YoY growth rate.

**Growth rates (% YoY) in mortgages and loans to NFCs**
(Source: ECB; CMMP)

Significantly, the growth rate in lending to NFCs (the largest element of COCO-based lending) grew faster (8.0% YoY) and contributed more to total lending (3.1ppt) than mortgage lending (the largest element of FIRE-based lending) which grew 5.1% YoY and contributed 2.1ppt to total lending.

So far, so good.

Rising inflation is outweighing each of these positive developments, unfortunately. Monetary trends adjusted from inflation, are sending very different and consistently negative messages.

**Growth rates (% YoY in real terms) in M1, HH credit and NFC credit**
(Source: ECB; CMMP)

Real growth rates in M1, HH credit and NFC credit typically display leading, coincident and lagging relationships with real GDP. Each indicator is falling at an increasing rate (see chart above). If historic relationships between the variables continue, this suggests a deceleration in overall economic activity over the next quarters.

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

“Still in-synch?”

Are the UK and EA money sectors still sending consistent messages?

The key chart

**Trends in UK and EA broad money** (Source: BOE; ECB, CMMP)

The key message

The messages from the UK and euro area (EA) money sectors were remarkably consistent during the COVID-19 pandemic. Are they still sending consistent messages now?

Growth in broad money rose sharply in both regions during the pandemic, peaking in 1Q21. Growth in narrow money (M1), and overnight deposits with banks within this, was the main driver of broad money growth. UK and EA households (HHs) were increasing savings and delaying consumption – deflationary rather than inflationary forces. Note, in this context, that growth in private sector credit (key assets of banks) did not match the growth in broad money (key ST liabilities of banks). Indeed the gap between money growth and lending growth reached historically high levels in 1Q21. These were atypical money and credit cycles.

Broad money growth has slowed down to pre-pandemic levels now. UK and EA HHs are no longer hoarding cash. The demand for consumer credit has recovered with the largest quarterly flows since the recovery began in 2Q21. Consumer credit demand has returned to pre-pandemic levels in the UK but has still to recover fully in the EA. Growth rates in money supply and private sector credit have also re-aligned as money and credit cycles have re-synched with each other. In the EA, lending growth exceeded money supply growth in June 2022 for the first time since October 2011. The contribution of productive COCO-based lending has also increased in both regions. In the EA, for example, NFC lending grew faster than mortgages in June 2022.

In short, the key signals that I have been following consistently since early 2021 are all sending broadly positive messages for the economic outlook in both the UK and EA. The money sectors are still sending consistent messages, albeit with slightly different areas of emphasis.

The UK is more geared towards a recovery in consumer credit and has benefited from a stronger recovery here. Overall credit growth is slowing in the UK, however. The EA has seen a more promising recovery in lending to NFC and credit growth is still accelerating (in nominal terms).

As highlighted in the previous two posts, rising inflation has overshadowed all of these positive developments in the EA and the UK, however. Credit growth is negative in real terms in both regions, and leading, coincident and lagging monetary indicators are slowing sharply and in a coordinated fashion.

The synchronisation in the messages from the UK and EA money sectors extends to both the good and the bad news. Plenty for optimists and pessimists to debate here…

Still in-synch?

The messages from the UK and euro area (EA) money sectors were remarkably consistent during the COVID-19 pandemic. Are they still sending consistent messages now?

The impact of the COVID-19 pandemic

**The impact of COVID-19 on UK and EA broad money growth** (Source: BoE; ECB; CMMP)

Growth in broad money rose sharply in both regions to peak in 1Q21 (see chart above). In the UK, the YoY growth rate in M4ex rose from 7.5% in March 2020 to a peak of 15.4% in February 2021. In the EA, the growth rate in M3 rose from 7.5% in March 2020 to a peak of 12.5% one month earlier in January 12.5%.

**Narrow money as %age of broad money in the UK and EA** (Source: BoE; ECB; CMMP)

Growth in narrow money (M1), and overnight deposits with banks within this, was the main driver of broad money growth. M1 currently accounts for 69% of UK M3 and 73% of EA M3, up from 48% and 51% respectively a decade earlier. This means that UK and EA households (HHs) were increasing savings and delaying consumption during the pandemic – deflationary rather than inflationary forces.

Put simply, money sitting idly in bank deposits contributes to neither growth nor inflation.

**The gap between UK and EA lending and money supply growth** (Source: BoE; ECB; CMMP)

Note that the growth in broad money (bank’s ST liabilities) was not matched by growth in private sector credit (banks’ assets). Indeed the gap between growth in money and growth in lending reached historic highs in 1Q21. In short, the money and credit cycles had moved out-of-synch with each other, and to a record extent.

The recovery from COVID-19

Broad money growth has slowed down to pre-pandemic levels now (see chart above). In June 2022, growth in M4ex had slowed to 4.4% in the UK and growth in M3 had slowed to 5.7% in the EA. These represent the slowest rates of growth since January 2020 and February 2020 respectively.

**Monthly HH money flows as a multiple of pre-pandemic average flows** (Source: BoE; ECB; CMMP)

HHs are no longer hoarding cash. In the UK, monthly HH money flows fell to £1.5bn in June 2022, 0.3x the average pre-pandemic flow of £4.7bn. In the EA, monthly HH deposit flows fell to €8.5bn, again this is 0.3x the average pre-pandemic flow of €33bn (see chart above).

**Quarterly consumer credit flows** (Source: BoE; ECB; CMMP)

The demand for consumer credit has recovered with the largest quarterly flows since the recovery began in 2Q21. At the peak of the crisis in 2Q20, UK and EA HHs repaid £13.2bn and €12.9bn in consumer credit respectively. More recently, we have seen five consecutive quarters of positive consumer credit flows (see chart above).

Consumer credit demand has returned to pre-pandemic levels in the UK but has still to recover fully in the EA. In the 2Q22, UK consumer credit flows recovered to £4.2bn, above the pre-pandemic average of £3.6bn. EA consumer credit flows also recovered to €7.5bn, but they remain below the pre-pandemic average of €10.8bn.

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

Annual growth rates in consumer credit have also recovered to post-pandemic highs, to 6.5% in the UK and 3.3% in the EA in June 2022. Note the relative gearing of the UK here (see chart above). Consumer credit growth slowed faster and recovered stronger in the UK than in the EA.

**Trends in the gap between UK and EA lending and money supply growth**
(Source: BoE; ECB; CMMP)

Growth rates in money supply and private sector credit have also re-aligned as money and credit cycles have re-synched with each other (see chart above). In the EA, lending growth exceeded money supply growth in June 2022 for the first time since October 2011. In the UK, lending growth still lagged money supply growth by 2.1ppt in June 2022, but this is much narrower than the peak gap of 11.5ppt seen in February 2021.

**Trends in UK and EA bank lending by type** (Source: BoE; ECB; CMMP)

The contribution of productive COCO-based lending has increased in both regions. In the EA, NFC lending grew faster (5.9%) than mortgages (5.3%) in June 2022. Less productive, mortgage lending remains resilient in the EA, but its growth is slowing in the UK (see chart above).

Conclusion

In short, the key signals that I have been following consistently since early 2021 are all sending broadly positive messages for the economic outlook in both the UK and EA. The UK has benefited from a stronger recovery in consumer credit. The EA has seen a more promising recovery in lending to NFC.

As highlighted in the previous two posts, rising inflation has overshadowed all of these positive developments, however (see “Accounting for inflation” and “Accounting for inflation – part 2”). Credit growth is negative in real terms in both the UK and EA, and leading, coincident and lagging monetary indicators are slowing sharply and in a coordinated fashion.

The synchronisation in the messages from the UK and EA money sectors extends to both the good and the bad news. Plenty for optimists and pessimists to debate here…

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

“Accounting for inflation – part 2”

Inflation also distorts the 2Q22 message from the UK money sector

The key chart

**Nominal and real growth rates in UK M4Lex** (Source: BoE; CMMP)

The key message

In my previous post, I explained how rising inflation distorts the 2Q22 messages from the euro area’s (EAs) money sector significantly. The same is true for the UK too.

Ignore inflation and the messages from the UK’s money sector are broadly positive for the economic outlook. The three key signals from the UK money sector that I have been following consistently since early 2021 are all sending broadly positive messages – UK HHs have stopped hoarding money, they are borrowing more to fund consumption, and money and credit cycles are re-synching. Growth rates in COCO-based consumer credit and NFC lending are also rising in the UK while the growth in FIRE-based mortgage lending is slowing. Does this sound familiar?

Rising inflation is over-taking these positive trends, however. Lending to private sector companies and households (M4Lex) is falling sharply in real terms (-6.5% YoY). Trends in real HH credit and real NFC credit are slowing sharply and in a coordinated fashion. This matters because these factors typically display coincident and lagging relationships with real GDP.

As in the EA, plenty of information for optimists and pessimists to debate here but with increasing ammunition for the pessimists…

Accounting for inflation – part 2

In the previous post, I explained how rising inflation distorts the 2Q22 messages from the euro area’s (EAs) money sector significantly. The same is true for the UK too.

The good news

Ignore inflation and the messages from the UK’s money sector are broadly positive for the economic outlook.

**Trends in monthly HH money flows** (Source: BoE; CMMP)

Monthly HH money flows have moderated slowly, reflecting lower levels of uncertainty. The monthly flow fell from £5.2bn in May 2022 to £1.5bn in June 2022. This is well below the average pre-pandemic flows of £4.6bn and the peak flow of £26bn recorded in May 2020 when HH uncertainty levels peaked at the height of the pandemic crisis (see chart above).

**Quarterly trends in HH money flows** (Source: ECB; CMMP)

The quarterly HH money flow in 2Q22 was £12.2bn (see chart above). This compares with the average pre-pandemic flows of £11.7bn. The message here is the same – HHs in the UK 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 credit has recovered. Monthly consumer credit flows rose to £1.8bn in June 2022 from £0.9bn in May 2022, well above the pre-pandemic average flows of £1bn. The YoY growth rate of 6.5% was the highest rate of growth since May 2019. Within this, the annual growth rate of credit card borrowing was 12.5% while other forms of consumer credit grew 4.1%. These were the highest rates of growth since November 2005 and March 2020 respectively.

**Quarterly trends in consumer credit** (Source: BoE; CMMP)

The quarterly flow of consumer credit rose from £3.1bn in 4Q21 and £3.6bn in 1Q21 to £4.2bn in 2Q22 (see chart above). The 2Q22 flow was the largest quarterly flow since 2Q18 and was above the pre-pandemic average of £3.6bn. There have now been five consecutive quarters of positive consumer credit flows, with current flows in-line or slightly above pre-pandemic levels.

**Growth trends in broad money (M4ex) and lending (M4Lex)** (Source: BoE; CMMP)

After the recent and unprecedented de-synchronisation of money and credit cycles, growth rates in UK money supply and private sector credit are converging (see chart above). The YoY growth rate in money (M4ex) slowed from 5.4% in May 2022 to 4.4% in June 2022. At the same time, the YoY growth rate in lending (M4Lex) fell from 3.9% to 2.3%. While the gap between the two growth rates widened slightly from 1.5ppt to 2.1ppt, it has narrowed considerably from its peak of 11.5ppt in February 2021.

**Growth trends in mortgages, consumer credit and NFC lending** (Source: BoE; CMMP)

Growth rates in COCO-based consumer credit and NFC lending are rising in the UK while the growth in FIRE-based mortgage lending is slowing (see chart above).

As described above, consumer credit is growing at the fastest rate since May 2019. NFC lending has also recovered to 2.0% YoY, marking five consecutive months of positive YoY growth.

Of course, mortgages remain the largest segment of UK private sector credit (89% of total HH credit and 61% of total PSC). The relative stability of mortgage demand has been a key feature of the messages from the UM money sector for some time. However, net borrowing of mortgage debt decreased from £8.0bn in May 2022 to £5.3bn in June 2022. The YoY growth rate also declined from 4.6% in May 2022 to 3.8% in June 2022, the slowest rate of growth since February 2021. Approvals for house purchases, an indicator of future borrowing, decreased to 63.700 in June 2022 from 65,700 in May. This is below the pre-pandemic average of 66,700.

The bad news

Take inflation into account and the messages are very different, however. Lending to private sector companies and HHs (M4Lex) slowed from 3.9% YoY in May 2022 to 2.3% YoY in June 2022 (see chart above). In real terms, M4Lex fell -6.5% YoY in June 2020, with all forms of lending declining in real terms.

**Growth trends (real terms) in HH and NFC credit** (Source: BoE; CMMP)

Furthermore, trends in real HH credit and real NFC credit are slowing sharply in a coordinated manner. This matters because these factors typically display coincident and lagging relationships with real GDP over time (see “Look beyond the yield curve” for more details).

Conclusion

The three key signals from the UK money sector that we have been following consistently since early 2021 are all sending broadly positive messages – UK HHs have stopped hoarding money, they are borrowing more to fund consumption, and money and credit cycles are re-synching. Growth rates in COCO-based consumer credit and NFC lending are also rising in the UK while the growth in FIRE-based mortgage lending is slowing.

Rising inflation is over-taking these positive trends, however. Lending to private sector companies and households (M4Lex) is falling sharply in real terms (-6.5% YoY) and traditional coincident and lagging monetary indicators have turned down sharply and in a coordinated fashion. Plenty of ammunition here for pessimists.

The format and presentation of this post mirrors that of the previous post deliberately. Why? Because the messages from the UK and EA money sectors have been very similar during the pandemic. The next post will compare and contrast these trends more closely.

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

“Accounting for inflation”

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).

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

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.

“Euro area re-synching – part 1”

EA money and credit cycles are re-synching

The key chart

**YoY growth rates in M3 and private sector credit and trends in excess liquidity**
(Source: ECB; CMMP)

The key message

Growth rates in euro area (EA) money supply and private sector credit continue to converge and re-align. This matters because the de-synchronisation of money and credit cycles over the past decade, which peaked during the COVID-19 pandemic, created major challenges for policy makers, banks and investors alike.

On a positive note, this reflects a combination of slowing (excess) money supply growth and rising demand for private sector credit. Recall that narrow money (M1), and within that overnight deposits, drove the expansion of broad money (M3) during the pandemic. The contribution of productive COCO-based lending is also increasing, led by a recovery in corporate credit. Importantly, COCO-based lending supports both production AND income formation.

That said, less-productive FIRE-based lending continues to be the more important driver of private sector credit in the EA, driven by resilient mortgage demand. FIRE-based lending, which accounts for more than half of the outstanding stock of credit, supports capital gains through higher asset prices but does not lead directly to income generation. This has negative implications for leverage, future growth, financial stability and income inequality.

In short, the message from the money sector here is broadly positive, albeit with the “hidden-risks” that are associated with higher levels of FIRE-based lending. In the second part of this analysis, I analyse money and credit trends in real terms to consider the implications here for the outlook for growth and business-cycle approaches to asset allocation. The conclusions here are less positive…

Euro area re-synching – part 1

Growth rates in EA money supply and private sector credit continue to converge and re-align (see key chart above). This matters because the de-synchronisation of these cycles over the past decade, which peaked during the COVID-19 pandemic, created major challenges for policy makers, banks and investors alike. The effectiveness of monetary policy, the dominant macro policy during this period, diminished dramatically as a result, and banks and investors had to deal with the consequences of excess liquidity for balance sheet management and the (mis-)pricing of both real and financial assets.

**What is driving the re-synching of money and credit cycles?** (Source: ECB; CMMP)

On a positive note, this reflects a combination of slowing (excess) money supply growth and rising demand for private sector credit (see chart above). Broad money (M3) growth has slowed from its January 2021 peak of 12.5% YoY to 6.0% YoY in April 2022. Growth in private sector credit has recovered from its May 2921 low of 2.7% YoY to 5.3% YoY, the highest nominal rate of growth since May 2020. The gap between the two growth rates (the green line in the chart above) has narrowed from 8ppt in January 2021 to 0.7ppt in April 2022, the narrowest gap since November 2018.

**Contribution (ppt) of COCO-based lending to total private sector credit** (Source: ECB; CMMP)

The contribution of productive COCO-based lending is also increasing (see chart above), led by a recovery in corporate credit. COCO-based lending, which includes lending to corporates (NFCs) and household (HH) consumer credit, contributed 1.9ppt towards to total PSC growth of 4.9% YoY in April 2022. This compares with only 0.4ppt to the total PSC growth of 3.0% in August 2021.

Note that COCO-based lending supports both production and income formation. Loans to NFCs are used to finance production, which leads to sales revenues, wages paid, profits realised and economic expansions. So while an increase in NFC debt will increase debt in the economy, it also increases the income required to finance it. Consumer debt also supports productive enterprise since it drives demand for goods and services, helping NFCs to generate sales, profits and wages. It differs from NFC debt to the extent that HHs take on an additional liability since the debt does not generate income.

**Contributions (ppt) of FIRE-based and COCO-based lending to total private sector credit**
(Source: ECB; CMMP)

That said, less-productive FIRE-based lending continues to be the more important driver of private sector credit (see chart above), driven by resilient mortgage demand (see also chart below).

**What’s driving private sector credit demand?** (Source: ECB; CMMP)

FIRE-based lending, which accounts for more than half of the outstanding stock of credit, supports capital gains through higher asset prices but does not lead directly to income generation. Loans to NBFIs are used primarily to finance transactions in financial assets rather than to produce, sell or buy actual output. Such credit may lead to an increase in the price of financial assets but does not lead (directly) to income generation. Mortgage or real estate lending is used to finance transactions in pre-existing assets. It typically generates asset gains as opposed to income (at least directly). As noted in previous posts, the shift towards FIRE-based lending has negative implications for leverage, future growth, financial stability and income inequality.

In short, the message from the money sector here is broadly positive, albeit with the “hidden-risks” that are associated with higher levels of FIRE-based lending.

**YoY real growth trends in M1, household and corporate credit** (Source: ECB; CMMP)

In the second part of this analysis, I analyse money and credit trends in real terms to consider the implications here for the outlook for growth and business-cycle approaches to asset allocation. The conclusions here are less positive…

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

“A desynchronised decade”

Created challenges for policy makers, banks and investors alike

The key chart

**Lending growth (% YoY) minus money growth for the UK and EA since 2012** (Source: BoE; ECB)

The key message

Money and credit cycles have been desynchronised for much of the past decade, creating major challenges for policy makers, banks and investors alike.

Growth in money supply has also exceeded growth in private sector credit in the euro area and for much of the period in the UK. The effectiveness of monetary policy, the dominant macro policy, has diminished dramatically as a result.

The gap between growth in money supply and private sector credit hit a historic high during the COVID-19 pandemic. More recently, however, these growth rates have converged as the build-up of excess savings has slowed and the demand for credit has recovered (at least in nominal terms).

This means that three key signals from the UK and EA money sectors have turned more positive: monthly HH money flows have fallen back below pre-pandemic levels; quarterly consumer credit flows have been positive since 2Q21 and have returned to pre-pandemic levels in the UK; and the gap between money supply and private sector credit growth has narrowed.

Macro challenges remain, but the message from the UK and EA money sectors is less bearish than consensus investment narratives.

A desynchronised decade

**Growth rates (% YoY) in EA money and lending** (Source: ECB)

**Growth rates (% YoY) in UK money and lending** (Source: BoE)

Money and credit cycles have been desynchronised for much of the past decade. In typical cycles, monetary aggregates and their key counterparties, such as private sector credit, move together. Put simply, 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. However, the two charts above show the extent to which, and the periods when, UK and EA money and credit cycles have diverged since March 2012.

**EA money flow minus credit flow (rolling quarters) since Mar 2012** (Source: ECB)

Growth in money supply has also exceeded growth in private sector credit in the euro area and for much of the period in the UK. The charts above (EA) and below (UK) illustrate trends in the gap between money and credit flows (rolling quarters) for both regions. The build-up of liquidity in both regions is clear to see. Increases in the supply of money have not been matched by equivalent increases in private sector demand for credit.

**UK money flow minus credit flow (rolling quarters) since Mar 2012** (Source: BoE)

The effectiveness of monetary policy, the dominant macro policy, has diminished dramatically as a result. Broadly speaking, monetary policy is effective if “central bank accommodation increase money and credit for the private sector to use” (Koo, 2015). Not only has credit growth lagged money supply growth, it has also been predominantly the “wrong type of credit” ie, less productive FIRE-based lending. As noted in previous posts, this has hidden risks in terms of leverage, future growth, financial stability and income inequality.

**Loan growth (% YoY) minus money growth** (Source: BoE; ECB)

The gaps between growth in money supply and private sector credit hit historic highs during the COVID-19 pandemic (see chart above). In the UK, loan growth exceeded money growth between August 2018 and December 2019. During the pandemic, however, the gap between money growth (15.4%) and credit growth (3.9%) widened to 11.5ppt in February 2021. In the EA, money growth (4.9%) exceeded credit growth (3.7%) by 1.2ppt at the end of 2019. The gap peaked at 8ppt in January 2021 – money growth of 12.5% versus credit growth of 4.5%.

**More recent YoY growth trends in UK and EA money and lending** (Source: BoE; ECB)

More recently, these growth rates have converged as the build-up of excess savings has slowed and credit demand has recovered (at least in nominal terms). At the end of 1Q22, money growth had slowed to 5.5% YoY in the UK while credit growth had risen to 3.7% YoY, a narrowing of the gap to only 1.8ppt. Similarly, in the EA, money growth at the end of 1Q22 had slowed to 6.3% YoY while credit growth was 4.7% YoY, a gap of 1.6ppt (see chart above).

Conclusion

What does this mean? Three key signals from the UK and EA money sectors have turned more positive: monthly HH money flows have fallen back below pre-pandemic levels; quarterly consumer credit flows have been positive since 2Q21 and have returned to pre-pandemic levels in the UK; and the gap between money supply and private sector credit growth has narrowed.

Macro challenges remain, but the message from the UK and EA money sectors is less bearish than consensus investment narratives.

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

“If confidence is collapsing – part 2”

We might expect HHs to repay consumer credit again

The key chart

**Quarterly flows in UK (£bn) and EA (EURbn) consumer credit** (Source: BoE, ECB)

The key message

If confidence is collapsing, we might reasonably expect households to be repaying consumer credit again. Are they…?

During the COVID-19 pandemic, households (HHs) in the UK and the euro area (EA) repaid consumer credit in four of the five quarters between 1Q20 and 1Q21 (see key chart above). The message from the money sector over this period was that HHs were increasing savings and delaying consumption.

Quarterly consumer credit flows have been positive since 2Q21, however, and have returned to pre-pandemic levels in the UK in 1Q22. Year-on-year growth rates have also recovered to their highest levels since February 2020 and March 2020 in the UK and the EA respectively. Before we get too excited, it is important to note that growth in consumer credit is negative in real terms (and EA HHs repaid €0.4bn of consumer credit in March 2022). So-called “faster indicators” also indicate that HHs in the UK are still delaying their spending on “delayable” good such as clothing and furniture indicating that the sustainability of consumption remains unproven still.

In short, the trends in two of the three key signals from the money sector remain positive, (if not that exciting). HHs in the UK and the EA have stopped hoarding cash and demand for consumer credit has remained positive. The recovery in the UK appears more advanced than in the EA, although current UK spending is concentrated towards work-related and staple items rather than delayable items.

The key message here is that while HH consumption patterns remain relatively subdued they are inconsistent with more extreme investment narratives.

Messages from the money sector were less optimistic than consensus investment narratives in 2H21 and less pessimistic than the current investment narrative now.

A positive for a macro-strategist currently “long cash”?

If confidence is collapsing – part 2

If confidence is collapsing, we might reasonably expect HH to be repaying consumer credit again. During the COVID-19 pandemic, HHs in the UK and the EA repaid consumer credit in four of the five quarters between 1Q20 and 1Q21 (see key chart above). Between 1Q18 and 4Q19, quarterly consumer credit flows averaged £3.6bn and €10.3bn in the UK and EA respectively. At the height of the pandemic (2Q20), UK and EA households repaid £13.2bn and €12.9bn respectively. The message from the money sector over this period was that HHs were increasing savings and delaying consumption.

Quarterly consumer credit flows have been positive since 2Q21, however, and have returned to pre-pandemic levels in the UK in 1Q22 (see chart above). UK consumer credit flows totalled £3.6bn in 1Q22, up from £3.3bn in 4Q21 and exactly in line with the average pre-pandemic quarterly flows. EA consumer credit flows totalled €4.4bn, down from €6.5bn in 4Q21. In contrast to the UK, current EA flows remain well below the pre-pandemic average flows of €10.3bn and EA HHs repaid €0.4bn of consumer credit in March 2022. Recall that in lesson #5 in “Seven lessons from the money sector in 2020”, I argued that,

“the UK is likely to demonstrate a higher gearing to a return to normality than the EA.”

**YoY growth rates in consumer credit in the UK and EA** (Source: BoE; ECB)

Year-on-year growth rates have also recovered to their highest levels since February 2020 and March 2020 in the UK and the EA respectively. In March 2022, UK and EA consumer credit grew 5.2% YoY and 2.5% YoY respectively (see chart above). Note again the relatively high gearing of the UK to a recovery in consumer credit demand. Before we get too excited, however, it is important to note that YoY growth in consumer credit is negative in real terms in both regions.

**Credit and debit card payments on durable goods compared with pre-pandemic levels**
(Source: ONS)

So-called “faster indicators” also indicate that HHs in the UK are still delaying their spending on “delayable” good such as clothing and furniture indicating that the sustainability of consumption remains unproven still. According to the latest ONS data, credit and debit card spending remains 12% below its pre-pandemic level and 51% below its 2021 high (see graph above). This makes delayable spending the weakest segment in current UK spending (see graph below). Overall card spending is just above pre-pandemic highs, reflecting relatively strong “work-related” and “staples” spending. The latter two segments are 24% and 13% above pre-pandemic levels respectively.

**Credit and debit card spending versus pre-pandemic levels broken down by type** (Source: ONS)

Conclusion

The key message here is that while HH consumption patterns remain relatively subdued they are inconsistent with the more extreme investment narratives that have gained popularity recently. Messages from the money sector were less optimistic than consensus investment narratives in 2H21 and less pessimistic than the current investment narrative now. A positive for a macro-strategist currently “long cash”?

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

“If confidence is collapsing – part 1”

Why have HH money flows fallen back below pre-pandemic levels?

The key chart

**Monthly HH deposit flows as a multiple of average pre-pandemic levels.** (Source: BoE; ECB)

The key message

If confidence is collapsing, why have household (HH) money flows in the UK and the euro area (EA) fallen back below pre-pandemic levels?

During the COVID-19 pandemic, HHs increased their holdings of liquid assets such as overnight deposits, despite earning negative real returns on those assets. In other words, the expansion of broad money over the period was a reflection of deflationary rather than inflationary forces, challenging the monetarist explanation for the current rise in inflation.

In both the UK and EA, monthly HH money flows have fallen back below pre-pandemic levels during 1Q22. These trends support the argument that forced savings, rather than precautionary savings, were the main driver of the spike in HH savings during the pandemic. This is important because forced savings can be released relatively quickly to support economic activity. Nonetheless, it would also be reasonable to assume that the level of precautionary savings would still be above pre-pandemic levels given the uncertainties caused by the Ukraine war, rising inflation and cost-of-living pressures. So far, at least, this does not seem to be the case…

…is the consensus narrative in relation to consumer confidence becoming too bearish?

If confidence is collapsing

If confidence is collapsing, why have household (HH) money flows in the UK and the euro area (EA) fallen back below pre-pandemic levels? Recall that these flows offer important insights into HH behaviour and were one of three key signals that CMMP analysis focused on throughout 2021 in order to interpret macro trends more effectively. The other signals were trends in consumer credit demand (growth outlook) and the synchronisation of money and credit cycles (policy context). I will turn to these signals in subsequent posts.

During the COVID-19 pandemic, HHs increased their holdings of liquid assets such as overnight deposits despite earning negative real returns (see key chart above). In the UK, monthly money flows peaked at £27bn in May 2020 and again at £21bn in December 2020, 5.8x and 4.5x average pre-pandemic levels of £4.6bn respectively. In the EA, monthly HH deposit flows peaked at €78bn in April 2020, 2.4x the average pre-pandemic level.

**Narrow money (M1) as a %age of broad money (M3)** (Source: BoE; ECB)

This meant that the expansion of broad money over the period was a reflection of deflationary rather than inflationary forces. Narrow money (M1), which comprises notes and coins in circulation and overnight deposits, has been increasingly important component/driver of broad money. In March 2022, M1 represented 68% and 73% of M3 in the UK and EA respectively (see chart above). This compares with respective shares of only 46% and 49% in March 2009. This matters for the simple reason that it challenges the monetarist explanation of rising inflation.

Money sitting idly in overnight deposits with banks contributes to neither growth nor inflation.

**UK monthly HH money flows (£bn) and multiple of pre-pandemic level (x)** (Source: BoE)

In both the UK and EA, monthly HH money flows have fallen back below pre-pandemic levels during 1Q22. In the UK, monthly flows in February and March 2022 were £4.1bn and £4.6bn respectively (see chart above). These compare with the average pre-pandemic flow of £4.7bn. In the EA, March 2022’s monthly flow of €16bn, was half the average pre-pandemic flow of €33bn (see chart below).

**EA monthly HH money flows (EURObn) and multiple of pre-pandemic level (x)** (Source: BoE)

These trends support the argument that forced savings, rather than precautionary savings, were the main driver of the spike in HH savings during the pandemic. This is important because forced savings can be released relatively quickly to support economic activity. Nonetheless, it would also be reasonable to assume that the level of precautionary savings would still be above pre-pandemic levels given the uncertainties caused by the Ukraine war, rising inflation and cost-of-living pressures.

So far, at least, this does not seem to be the case…is the consensus narrative too bearish?

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

“Slow and steady as she goes”

HH behaviour is normalising but policy challenges remain in the euro area

The key chart

**Monetary developments in the euro area since 1999** (Source: ECB; CMMP)

The key message

Broad money growth in the euro area (EA) slowed to 6.9% in December 2021, the slowest rate of growth since February 2020. What is the main driver here and what are the messages for household behaviour, growth, macro policy and the productiveness of lending?

Narrow money (9.8% YoY) continues to be the main driver of broad money growth, contributing 7ppt to the overall 6.9% growth. Overnight deposits (10.1% YoY) contributed 6.2ppt alone. Note (again) that money sitting idly in overnight deposits contributes to neither growth nor inflation. Explanations for rising inflation lie elsewhere.

The on-going moderation in monthly household (HH) deposit flows indicates reduced uncertainty and a normalisation of behaviour. While these flows rose from €17bn in November 2021 to €23bn in December 2021, they remain below the pre-pandemic average of €33bn.

HHs repaid €3.3bn in consumer credit in December 2021, the first net repayments since April 2021. That said, positive quarterly flows of consumer credit of €2bn, €4bn and €b4bn in 2Q21, 3Q21 and 4Q21 respectively also point to a steady normalisation in HH behaviour.

Money and credit cycles remain out-of-synch with each other, presenting an on-going challenge to policy makers. The degree of de-synchronisation reached its narrowest level since March 2020, however, an indication that the build-up of excess liquidity in the EA is slowing.

The additional challenge for policy makers is that less productive FIRE-based lending continues to be the main driver of PSC. This re-enforces the need for macroprudential polices to address rising financial stability risks in the residential real estate (RRE) sector.

In short, the message from the money sector at the end of 2021 and the start of 2022 is mixed. HH behaviour is normalising with deposit flows moderating and demand for consumer credit recovering. Against this, policy makers face the dual challenge of de-synchronised money and credit cycles and excess growth in less-productive FIRE-based lending. Four key signals to watch in 2022…

Slow and steady as she goes

**Long-term trends in EA broad money (% YoY)** (Source: ECB; CMMP)

Broad money (M3) growth in the euro area (EA) slowed from 7.4% YoY in November 2021 to 6.9% YoY in December 2022, the slowest rate of growth since February 2021 (see chart above). This post examines the current drivers of broad money growth and the implications for household behaviour, growth, macro policy and the productivity of lending in the EA.

**Twenty year trends in M3 (% YoY) and contribution (ppt) from M1** (Source: ECB; CMMP)

Narrow money (M1) continues to be the key driver of broad money growth in the EA. M1 grew 9.8% YoY in December 2021 and contributed 7.0ppt to the overall 6.9% growth in broad money alone (see chart above). Within M1, overnight deposits grew 10.1% YoY and contributed 6.2ppt to M3 growth while currency in circulation grew 7.7% YoY and contributed 0.7ppt to M3 growth.

The key point here is that growth in overnight deposits has been the main driver of broad money growth during the COVID-19 pandemic. This matters because money sitting idly in bank deposits contributes to neither growth nor inflation. The causes of rising inflation lie elsewhere.

**Trends in monthly HH deposits (EURbn) since January 2019** (Source: ECB; CMMP)

The on-going moderation in monthly household (HH) deposit flows indicates reduced uncertainty and a normalisation of HH behaviour. The sharp rise seen during Phase 2 of the pandemic (see chart above) was driven by a combination of forced and precautionary HH savings – that is, money that was not spent. At their peak of €78bn in April 2020, monthly flows were almost 2.5x their pre-pandemic levels.

In December 2021, monthly flows had fallen back to €23bn, up from €17bn in November 2021, but below the pre-pandemic average level of €33bn. Similarly, HH deposit flows for the 4Q21 were €59bn, down from €109bn and €93bn in the 3Q21 and 2Q21 respectively and below the average €99bn quarterly flows recorded during 2019.

**Monthly flows (EUR bn) and growth rates (% YoY) in consumer credit** (Source: ECB; CMMP)

HHs repaid €3.3bn in consumer credit in December 2021. This was the first net repayment since April 2021 (see chart above). That said, quarterly flows of consumer credit €2bn, €4bn and €b4bn in 2Q21, 3Q21 and 4Q21 respectively (see chart below) also point to a normalisation in HH behaviour.

**Quarterly flows (EUR bn) in consumer credit** (Source: ECB; CMMP)

**Trends in money and credit cycles in the euro area** (Source: ECB; CMMP)

Money and credit cycles remain out-of-synch with each other, presenting an on-going challenge to policy makers. The gap between the YoY growth rate of PSC (4.7%) and the YoY growth rate in M3 (6.9%) was -2.8ppt in December 2021 (see chart above). While the degree of de-synchronisation has reached its narrowest level since March 2020, the challenge for policy makers remains since, “monetary policy effectiveness is based on certain stable relationships between monetary aggregates” (Richard Koo, The Holy Grail of Macroeconomics).

**Trends in PSC (% YoY) in nominal and real terms** (Source: ECB; CMMP)

Private sector credit (PSC) grew 3.9% YoY in nominal terms in December 2021 but fell -1.0% YoY in real terms (see chart above). The additional challenge for policy makers is that less productive FIRE-based lending continues to be the main driver of EA credit. FIRE-based lending contributed 2.5ppt to the overall 3.9% YoY growth rate in PSC in December 2022 (see chart below). Mortgages alone contributed 2.1ppt to this, re-enforcing the need for macroprudential polices to address rising financial stability risks in the residential real estate sector.

**Trends in PSC (% YoY) and breakdown (ppt) between FIRE-based and COCO-based lending** (Source: ECB; CMMP)

On a final positive note, the contribution of more productive COCO-based lending to overall PSC growth hit its highest level since March 2021 (see chart below), but all forms of COCO-based lending declined YoY in real terms.

**Trends in PSC (% YoY) and contribution (ppt) of COCO-based lending** (Source: ECB; CMMP)

Conclusion

In conclusion, the message from the money sector at the end of 2021 and the start of 2022 is mixed. HH behaviour is normalising with deposit flows moderating and demand for consumer credit recovering. Against this, policy makers face the dual, on-going challenge of de-synchronised money and credit cycles and excess growth in less-productive FIRE-based lending. Four key signals for 2022…

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

“Not what the doctor ordered”

Rising UK COVID-19 risks come at an unfortunate time

The key chart

**Trends in monthly HH money flows (£bn) compared to 2019 average monthly flows** (Source: BoE; CMMP)

The key message

The rise in COVID-19 cases and the discovery of the new Omicron variant come at a delicate and unfortunate time for the UK economic recovery (and associated recovery trades).

According to the Bank of England’s latest “Money and Credit” release for October 2021, monthly household money flows were moderating and demand for consumer credit was recovering at the start of 4Q21 – positive trends in two of our three key signals for 2021. So called “faster indicators” such as credit and debit card payments also indicate that positive trends continued into mid-November 2021.

There is never a good time for COVID-related risks to be rising, but it is particularly unfortunate that the threat of renewed uncertainty and restrictions on economic activity has coincided with an apparent inflexion point in the messages from the UK money sector.

Not what the doctor ordered in either a literal or metaphorical sense.

Not what the doctor ordered

The rise in COVID-19 cases and the discovery of the new Omicron variant come at a delicate and unfortunate time for the UK economic recovery and associated recovery trades.

**COVID cases and deaths (7 day MVA) in the UK** (Source: UK government; CMMP)

The number of people who tested positive has risen to 42, 583 according to the latest data provided on 29 November 2021. This represents an increase of 4,574 cases (12%) since the end of October 2021 (see chart above). In response to the identification of the new variant, the UK government has tightened restrictions on face coverings and entry into the UK. The booster programme for vaccines has also been accelerated. It remains too early to know if further restrictions will be required.

Why the timing is so bad

**Key signal #1: looking for a moderation in HH money flows** (Source: BoE; CMMP)

According to the Bank of England’s latest “Money and Credit” release for October 2021, monthly household money flows slowed sharply at the start of 4Q21.

These flows represent a useful proxy for household uncertainty. They peaked at £28bn (6x pre-pandemic levels) in May 2020 and again at £21bn (4x pre-pandemic levels) in December 2020. Note that money flows combine forced and precautionary elements of household savings. During periods of “lockdown” (see black bars in chart above), they averaged 4x their pre-pandemic levels reflecting the added impact of forced savings. Between lockdowns and since lockdowns they have averaged 2x their pre-pandemic levels.

Monthly flows fell from £9bn (2x pre-pandemic levels) in September 2021 to £5bn (1.2x pre-pandemic levels) in October 2021, the lowest monthly flow since February 2020.

**Key signal #2: looking for a recovery in consumer credit demand (£bn LHS, % YoY RHS)** (Source: BoE; CMMP)

UK households borrowed £0.7bn in consumer credit in October 2021, the strongest net borrowing since July 2020 (see chart above). Monthly flows have been positive since April 2021 – seven consecutive months of positive net borrowing. The majority of this borrowing (£0.6bn) was additional borrowing on credit cards, which was also the strongest since July 2020 (£0.9bn).

The annual growth rate in consumer credit remains negative, however (green line in chart above). That said, the YoY growth rate has narrowed to -1.0% in October from -1.7% in September and the low of -9.1% in January 2021.

**Credit and debit card payments (7d rolling average) in aggregate and on delayable goods in relation to pre-pandemic levels** (Source: ONS; CMMP)

So called “faster indicators” such as credit and debit card payments also indicate that these positive trends continued into mid-November 2021. After a sharp recovery in payments in March and April 2021 (following the easing of restrictions) momentum slowed in 2Q21 and 3Q21. Aggregate card payments rebounded in November, however, to reach 103% of pre-pandemic levels (see chart above).

**The build up in excess HH savings (£bn) during the COVID-19 pandemic** (Source: BoE; CMMP estimates)

Spending on “delayable” goods such as clothing and furniture has also recovered to 104% of pre-pandemic levels during November. This matters because spending on delayable goods is a useful indicator regarding the extent to which the £160bn in excess savings built up during the pandemic is returning to the economy via household consumption. The evidence to date is that while the build up of excess savings has slowed, this cash has yet to be spent (see chart above). A positive note to carry into the new year.

Conclusion

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