#uk – Page 2 – Chris Mallin Macro Perspectives

“Data (In)dependent?”

The risks of ignoring UK private sector credit dynamics

The key chart

Trends in UK PS debt ratio (RHS) and PSC relative growth factor (LHS) (Source: BIS; CMMP)

The key message

Central bank decision-making that appears largely “data independent” in relation to private sector credit dynamics is unlikely to produce positive economic outcomes. Instead, it increases the likelihood of policy errors, especially in credit-driven economies.

It’s far too easy to blame certain individuals here (Bailey, Lagarde, Powell – you chose). The real blame lies more in the persistently flawed nature of macro thinking that frames policy decisions, however.

The fundamental error is to ignore that aggregate demand in a credit-driven economy (like the UK) is equal to income (GDP) PLUS THE CHANGE IN DEBT

(see Schumpeter 1934, Keen 2011).

The addition of the change in debt means that, in reality, aggregate demand is far more volatile than it would be if income alone was its source (as typically assumed). This is especially true for highly indebted economies.

In my analysis, I highlight three key factors when analysing the impact of debt on economic activity: the amount of debt, the rate of change of debt, and its rate of acceleration – each measured in relation to the level of GDP.

The chart above summaries these factors visually for the UK economy. The maroon line shows the UK private sector debt ratio (% GDP), while the blue line shows the rate of growth in credit compared to the rate of growth in nominal GDP (rolling 3Y CAGR).

The first key point is that the UK private sector has been deleveraging from most of the post-GFC period. The private sector debt ratio has fallen from 185% GDP in 1Q10 to 149% GDP in 2Q23.

The second key point is that a slowdown in the rate of growth can be enough to trigger a recession – an absolute fall in debt is not required. With the rate of credit growth below the rate of nominal GDP growth for the past three quarters, the impact of further policy tightening on aggregate demand is likely to be greater than forecast officially.

In short, the risk of policy errors continues to rise.

Data Independent?

The Bank of England (BoE) is likely to raise interest rates for the 15^th consecutive time to 5.5% on Thursday 21 September. Policy makers will no doubt stress that inflation in the UK remains too high and that “raising interest rates is how the BoE can help to get inflation back down.” (see, “Why have interest rates in the UK gone up?” BoE website).

Note #1, that the BoE website highlights three variables that policy makers focus on when making decisions:

How fast prices are rising now, and how that is likely to change
How the UK economy is growing now, and how that is likely to change
How many people are in work now, and how that is likely to change

Note #2, the lack of reference here to private sector debt dynamics. This is despite the fact that the BoE also argues that, “higher interest rates make it more expensive for people to borrow money and encourage people to save. Overall, that means people will tend to spend less. If people spend less on goods and services, the prices of those things tend to rise more slowly.”

Part of the problem here is that the impact of private sector debt on economic growth (variable 2) is largely absent for current macro thinking. Hence the assessment of how the UK economy is growing is likely to be based on traditional measures of income (GDP), while ignoring the impact of the change in private sector credit.

Why is this a problem?

The economist Schumpeter argued back in 1934 that, “in a growing economy, the increase in debt funds more economic activity than can be funded by the sale of existing goods and services alone.” Yet critically, traditional policy frameworks typically ignore the fact that:

Aggregate demand in a credit-driven economy is equal to income (GDP) plus the change in debt

As Professor Steve Keen argues,

“this makes aggregate demand far more volatile that it would be if income alone was its source, because while GDP changes relatively slowly, the change in debt can be sudden and extreme. In addition, if debt levels are already high relative to GDP, then the change in the level of debt can have a substantial impact in demand.”
Debunking Economics, Keen 2011

How CMMP analysis views UK debt dynamics

CMMP analysis incorporates a deep understanding of global debt dynamics. This includes not just the level of debt, but also its rate of change and its rate of acceleration – all measured with respect to the level of GDP.

Trends in UK PS debt ratio (RHS) and PSC relative growth factor (LHS) (Source: BIS; CMMP)

The key chart above illustrates these dynamics for the UK since 1983. The maroon line illustrates the private sector debt ratio – debt as a percentage of GDP. The blue line illustrates the 3Y CAGR in private sector credit versus the 3Y CAGR in nominal GDP (the CMMP “relative growth factor”).

The PS debt ratio increased from 68% GDP in 1Q83 to a peak of 185% GDP in 1Q10. The fastest rates of acceleration (peak excess credit growth) occurred in phase 1 (1Q83-1Q91) and phase 3 (1Q97 – 1Q01) as shown by the blue line above. In phase 4 (1Q01-1Q10), the debt ratio continued to rise but the rate of acceleration slowed.

The UK private sector has been deleveraging for most of the post-GFC period. The debt ratio fell to 149% GDP in 1Q23, the lowest level since 2Q02. My preferred RGF has been negative for the past three quarters. In other words, the growth in credit is slower than the growth in GDP.

They key point here is that an absolute fall in debt is not needed to cause problems, a slowdown in the rate of growth can be enough to trigger a recession (a topic that will be discussed in more detail in future posts).

With the rate of credit growth below the rate of nominal GDP growth for the past three quarters, the impact of further policy tightening on aggregate demand is likely to be greater than forecast officially.

In short, the risk of policy errors continues to rise.

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

“How high would the UK base rate have to go…”

…for debt vulnerabilities to return to GFC levels?

The key chart

Share of UK HHs with mortgage COLA-DSRs above 70% (Source: BoE Financial Stability Review, July 2023)

The key message

How high would the UK base rate have to increase for HH debt vulnerabilities to return to GFC levels? To around 9% according to the Bank of England today, up from a broader, estimated range of 5-8% indicated a year ago…

The Bank of England (BoE) held a press conference regarding its July 2023 Financial Stability Review (FSR) this morning (12 July 2023). As always, the question and answer session was particularly important not least in the request for clarification on rising HH debt vulnerabilities.

Recall that a year ago, Sir Jon Cunliffe, the Deputy Governor for Financial Stability, was asked for clarification on this topic – how far would interest rates have to rise for HH debt vulnerabilities to reach the GFC peak levels?

In response, he indicated that rates would have to rise by between 200-500bp above the existing market expectations. These were 3% at the time. In other words, the base rate would need to return to between 5% and 8% for debt vulnerabilities to return to the GFC levels. Today’s UK base rate is 5%, at the bottom end of this range.

In the latest FSR, the Bank of England returned to this topic. The Bank stated that, “The proportion of HHs with high mortgage cost-of-living-adjusted debt-servicing ratios (COLA-DSRs) is expected to continue to increase [from 2% in 1Q23] to around 2.3%…by the end of the year. But it would stay below the recent peak reached in 2007 of 3.4%.” (see key chart)

Importantly, the report then notes that, “To reach that peak level by the end of 2024, it would require mortgage rates to be around three percentage points higher relative to current expectations [c.6%], other things being equal.”

In short, the BoE has narrowed the range and increased the level of the base rate that would lead to a return of GFC levels of HH debt vulnerabilities – to 9%.

The main reason, according to Sir Jon Cunliffe, is the level of support provided by banks in terms of extending mortgage terms, changing mortgage terms and supporting moves to interest-only mortgage. In other words, more options and support from banks has given slightly more “breathing room” before debt vulnerabilities return to their recent 2007 peak.

A year ago, I felt that the BoE was verging on complacency in terms of rising HH debt vulnerabilities. Ninety days later the tone of the message changed and higher risks acknowledged. Today, we have a narrow and clearer “risk target” but the body language was less-than-convincing, in my opinion.

“Behind a nation of non-savers”

The largest fall in UK real living standards since records began

The key chart

**Trends and OBR forecasts for UK households sector balances (% GDP)**
(Source: OBR; CMMP)

The key message

Hidden behind the headlines of yesterday’s (15 March 2023) UK budget are three important trends:

The shift from large UK household (HH) surpluses (the main counterpart to government deficits) to…
…little or no net HH savings or borrowings…
…and rising financial inequality

Official OBR forecasts suggest that UK living standards will experience the largest two-year fall in real living standards since records began, bringing real HH disposable income (RHDI) per capita back to 2014-15 levels. Drawdowns on HH savings will not fully compensate for falling RHDIs, hitting consumption and growth in the process.

Expect these trends and rising financial inequality to be centre stage in the build up to the next UK general election – even if they were missing from yesterday’s budget coverage.

Behind a nation of non-savers

UK HHs built up large financial surpluses during the COVID-pandemic and the energy crisis. These surpluses were the main counterpart to the UK government’s large fiscal deficit (see chart below).

**The impact of COVID on UK HH and government sector balances (% GDP)**
(Source: OBR; CMMP)

According to latest OBR forecasts, the HH sector will move from a net lending position in 2022 to balance in 2023, however, as savings are drawn down to support consumption (see key chart above).

What factors are behind a nation of non-savers, and what do they mean for the UK’s economic and political outlook?

**Trends and forecasts for RHDI (% YoY)**
(Source: OBR; CMMP)

The OBR expects RHDI to fall by 2.6% in 2023, as inflation (4.9%) continues to outstrip nominal earnings growth (3.6%). This follows a fall of 2.5% in 2022 (see chart above).

**Trends and forecasts for RHDI per capita (£ thousands)**
(Source: OBR; CMMP)

The OBR also forecasts that RHDI per person (a measure of living standards) will fall by 6% between FY22 and FY 24 – the largest two-year fall in real living standards since records began in the 1950s. If correct, RHDI per person would fall to its lowest level since FY2015 (see chart above).

In response, HHs can either save less, borrow more and/or consume less. The OBR’s forecasts focus on the first factor. HH’s saving is expected to fall to zero in 2023 and 2024 to “support consumption in the face of weak real income growth.” As the “cost-of-living crisis” eases, the savings ratio is forecast to recover to around 1%, still well below the post-financial crisis average (see chart below).

**Trends and forecasts for HH savings ratio (% disposable income)**
(Source: OBR; CMMP)

Lower savings will only partially offset the drop in real incomes, however. This means that private consumption will fall in 2023 by 0.8%. Note that the OBR estimates that this fall would be 1.5ppt higher if the savings ratio remained at 2022 levels. Looking further ahead, the forecasts suggest that consumption growth recovers to an average 1.7% a year out to 1Q28 – better than forecast in November, but still unexciting.

**HH savings ratio by income decile (% disposable income)**
(Source: BoE; CMMP)

What is missing here is the outlook for financial inequality. Lower-income HHs have much less flexibility to adjust their spending in response to rising prices and are less likely to have a cushion of savings to protect them. Recall that HHs in the bottom three income deciles save less than 6% of their gross income. This contrasts with HHs in the top two income deciles who save more than 30% of their gross income (see chart above).

Conclusion

Official forecasts suggest that UK living standards will experience the largest two-year fall in real living standards since records began, bringing real HH disposable income (RHDI) per capita back to 2014-15 levels. Drawdowns on HH savings will not fully compensate for falling RHDIs, hitting consumption and growth in the process.

Expect these trends and rising financial inequality to be centre stage in the build up to the next UK general election – even if they were missing from yesterday’s budget coverage.

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

“Still unbalanced and dependent”

OBR forecasts present a brighter outlook, but fundamental challenges remain

The key chart

**Trends and OBR forecasts for UK sector balances (% GDP)**
(Source: OBR; CMMP)

The key message

The OBR’s latest “Economic and fiscal outlook” (published 15 March 2023) presents a brighter outlook for the UK economic and fiscal outlook – a shorter and shallower downturn, higher medium term output and lower budget deficits and public debt.

Viewed from our preferred sector balances perspective, however, the forecasts indicate that fundamental challenges and economic imbalances remain.

According to the OBR….

While the Chancellor and other fiscal hawks celebrate lower deficits, the UK’s household (HH) sector will move from a large surplus to a balance as savings are drawn down to support consumption during the squeeze on real disposable incomes. (This means no net HH saving or borrowing over a sustained period – really??). Private consumption will still fall in 2023, however (by 0.8%), as lower savings will only partially offset the decline in incomes.

Corporate (NFC) investment will disappoint too. The NFC sector moves from a modest surplus (ie, disinvestment) to balance as investment picks up, but only gradually.

With the private sector running small surpluses (as opposed to the small deficits forecast in November 2022), borrowing from the rest of the world remains sizeable and persistent.

In short, the OBR expects a return to the pre-pandemic world of economic imbalances. The good news, for what it’s worth, is that the private sector is forecast to run a small surplus rather than a deficit as before (and as predicted in November 2022). The bad news is that the UK economy is forecast to remain heavily dependent on net borrowing from abroad. A familiar story…

Six charts that matter

**The impact of COVID on UK domestic sector balances (% GDP)**
(Source: OBR; CMMP)

Don’t forget the context (see chart above)!

The counterpart to the large government debt built up during the pandemic (-26% GDP, June 2020) was large financial surpluses for UK households (+18% GDP, June 2020) and, to a lesser extent, UK corporations (+7% GDP).

From here, and according to the OBR….

**Trends and OBR forecasts for government net borrowing (% GDP)**
(Source: OBR; CMMP)

**Trends and OBR forecasts for HH sector balances (% GDP)**
(Source: OBR; CMMP)

**Trends and OBR forecasts for NFC sector balances (% GDP)**
(Source: OBR; CMMP)

**Trends and OBR forecasts for RoW sector balances (% GDP)**
(Source: OBR; CMMP)

In short, the OBR expects a return to the pre-pandemic world of economic imbalances (see chart below).

The good news, for what it’s worth, is that the private sector is forecast to run a small surplus rather than a deficit as before (and as predicted in the previous OBR forecasts).

The bad news is that the UK economy is forecast to remain heavily dependent on net borrowing from abroad. A familiar story…

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

“No growth in productive lending”

Does the lack of growth in UK corporate lending since 2008 matter?

The key chart

**Trends in sterling lending to corporates since 2003 (£bn)**
(Source: BoE; CMMP)

The key message

The outstanding stock of sterling lending to private sector companies (NFCs) in the UK was £455bn at the end of January 2023. This is £61bn or 12% below the peak of NFC lending back in August 2008.

Does the lack of growth in UK corporate lending since 2008 matter, and if so, why?

NFC lending represents the largest segment of productive “COCO-based lending” i.e. lending that supports both production and income formation. Note that while an increase in NFC lending increases the level of debt in the economy, it also increases the income required to finance it.

Back in July 2015, the UK government argued that the financial services sector, “is critical for supporting the rest of the economy, allocating resources and facilitating long term productive investment.” Fast-forward 90 months, and only 17 pence in every pound lent in the UK supports NFCs is generating sales revenues, wages, profits and economic expansion, however. (This contrasts with 39 cents in every euro lent in the euro area.)

Rather that supporting production and income formation, UK lending has become increasingly skewed towards supporting capital gains largely through higher asset prices (78% of total lending). Mortgages alone account for 53p in every pound lent in the UK, for example.

This is an important part of the context for the Chancellor’s Budget on 15 March 2023. In considering options for stimulating growth in the UK economy, Jeremy Hunt, might ponder the question, “what is the purpose of UK banking?”

Proposals that stimulate investment and encourage a shift back towards more productive forms of bank lending would be welcome.

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

“Not so synchronised!”

Contrasting messages from the UK and EA money sectors

The key chart

**Trends in monthly consumer credit flows expressed as a multiple of pre-pandemic averages (x)** (Source: BoE; ECB; CMMP)

The key message

While the UK and euro area (EA) money sectors are sending consistent messages about the slowdown in mortgage demand, their messages about consumer credit demand are contrasting and diverging.

Monthly consumer credit flows recovered in the UK in January 2023, back to their pre-pandemic levels and to their highest level since June 2022. In contrast, they fell and remain depressed in relation to their pre-pandemic levels in the EA.

This matters for two reasons: (1) increased borrowing is one way that households can offset the pressures from falling real incomes and (2) consumer credit is the second most important element of productive COCO-based lending.

More policy challenges for the ECB…

Not so synchronised

UK consumer credit flows

The monthly flow of UK consumer credit increased to £1.6bn in January 2023, from £0.8bn in December 2022. This was the highest net borrowing since June 2022 and was 1.3x the pre-pandemic flow of £1.2bn. The 3m MVA of consumer credit flows increased to £1.2bn in January, from £1.0bn in December, very slightly above the pre-pandemic flow (see chart below).

**Monthly flows of UK consumer credit (£bn)**
(Source: BoE; CMMP)

EA consumer credit flows

In contrast, the monthly flow of EA consumer credit fell to €0.3bn in January, down from €1.5bn in December and only 0.1x the pre-pandemic average flow of €3.4bn. The 3m MVA of consumer credit flows decreased to €1.3bn in January, from €1.7bn in December, 0.4x the pre-pandemic average flow.

Note that consumer credit flows in the EA have failed to recover to their pre-pandemic levels (see chart below).

**Monthly flows of EA consumer credit (EUR bn)**
(Source: ECB; CMMP)

Why this matters

This matters since increased borrowing is one way that UK and EA HHs can offset the pressures from falling disposable incomes (along with reduced savings).

Consumer credit is also the second most important element of productive COCO-based lending, after corporate credit. It supports productive enterprise since it drives demand for goods and services, hence helping corporates to generate sales, profits and wages.

More policy challenges for the ECB…

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

“After two decades of fuelling the FIRE…”

…What is the purpose of UK banking?

The key chart

**Trends and breakdown of UK FIRE-based (red and pink) and COCO-based (blue) lending (£bn)**(Source: BoE; CMMP)

After two decades of fuelling FIRE-based lending, is it time to ask, “what is the purpose of UK banking?”

Bank lending falls into two categories: lending that supports capital gains largely through higher asset prices (FIRE-based); and lending that supports production and income formation, i.e. productive enterprise (COCO-based). The former includes mortgage or real estate lending and lending to NBFIs. The latter includes corporate lending and consumer credit.

**Trends in the breakdown of UK sterling lending since 2002 (% total)**
(Source: BoE; CMMP)

Twenty years ago, less productive FIRE-based lending accounted for 67% of M4L, the Bank of England’s headline credit series. Today it accounts for 78%. The contribution of mortgages, the largest component of FIRE-based lending, has risen from 47% to 53% over the period. This means that nearly 80 pence in every pound lent by UK MFIs finances transactions in pre-existing assets (real estate) or in financial assets. Note that mortgages are the only component of M4L to register a record high at the end of 2022.

In contrast, only just over 20 pence in every pound lent in the UK finances productive enterprise. The contribution of lending to corporates, the largest component of productive COCO-based lending has fallen from 20% to 17% over the past two decades. Note that this lending supports sales revenues, wages, profits and economic expansion. Lending that increases debt in the economy BUT critically also increases the income required to finance it. The outstanding stock of sterling loans to UK corporates at the end of 2022 (£445bn) was £61bn or 12% lower than its peak (£516bn) recorded in August 2008.

Lending in any economy involves a balance between these different forms. A key point here is that the shift from COCO-based lending to FIRE-based lending as seen in the UK reflects different borrower motivations and different levels of risks to financial stability. This has negative implications for leverage, growth, financial stability and income inequality.

Classifying lending according to its productive purpose tells us what the purpose of UK banking is today – largely to support capital gains rather than production and (direct) income formation.

The obvious follow-on question is, “what should it be?”

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

“Tightening into…”

…Subdued (EA) and slowing (UK) demand for consumer credit

The key chart

Quarterly consumer credit flows as a multiple of pre-pandemic average flows (Source: BoE; ECB; CMMP)

The key message

The ECB and Bank of England are expected to deliver 50bp rate increases today (2 February 2023) in the face of relatively subdued (euro area) and slowing (UK) demand for consumer credit.

Both regions have experienced seven consecutive quarters of positive demand for consumer credit since 1Q21 (see key chart above). Euro area (EA) demand has remain relatively subdued, however, and has failed to recover to pre-pandemic levels. Quarterly consumer credit flows, for example, ended 2022 at €5.0bn, only 0.5x the pre-pandemic average of €10.3bn. UK consumer credit demand hit £4.4bn in 2Q22 (1.2x the pre-pandemic average flow of £3.6bn) but slowed to £2.8bn in 4Q22 (0.8x the pre-pandemic average flow).

This matters for two reasons:

First, increased borrowing is one way that EA and UK households can offset the pressures from falling real disposable incomes (along with reduced savings);
Second, consumer credit is the second most important element of productive COCO-based lending, after corporate credit. It supports productive enterprise since it drives demand for goods and services, hence helping corporates to generate sales, profit and wages.

The EA and UK money sectors are both sending clear messages of slowing demand for consumer credit and mortgages. The contrast with the US is interesting – the FED is slowing the pace of rate increases to 25bp despite the fact that US consumer credit flows remain well above their pre-pandemic levels.

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

“Steady as she slows – Part IV”

Synchronised slowdowns in monthly UK and EA mortgage flows are accelerating

The key chart

**Monthly mortgage flows (3m MVA) as a multiple of pre-pandemic average flows**
(Source: BoE; ECB; CMMP)

The key message

Current trends in the euro area (EA) and UK mortgage markets provide little cheer for investors hoping for a growth recovery in the regions.

The synchronised slowdown highlighted last month accelerated further in December 2022. Monthly mortgage flows have fallen below their respective pre-pandemic averages in both cases. The rate of slowdown is particularly sharp in the EA.

Given that mortgage demand typically displays a co-incident relationship with real GDP, the message from the UK and EA money sectors is one of rising risks to the economic outlook – the challenging context for central bank decisions this week.

Monthly mortgage flows – the key trends

Monthly mortgage flows have fallen below their pre-pandemic levels in both regions (see key chart above). The 3m MVA of monthly mortgage flows in the EA (€7.2bn) has fallen to only 0.58x the pre-pandemic flow (€12.5bn). In the UK, the 3m MVA of mortgage flows (£3.7bn) fell to 0.95x the pre-pandemic flow (£3.9bn). This was the first time that the UK’s monthly mortgage flow has fallen below its pre-pandemic average since December 2021.

The rate of slowdown in mortgage lending flows is particularly sharp in the EA. Flows have fallen from €26bn in June 2022 (2.02x pre-pandemic average) to €7bn in December 2022 (0.58x pre-pandemic average). This compares with respective multiples of 1.32x (June) and 0.95x (December) for UK mortgage flows.

Monthly mortgage flows – the UK details

**Monthly mortgage flows (£bn) and annual growth rate in outstanding stock (RHS)**
(Source: BoE; CMMP)

Monthly UK mortgage flows fell to 3.2bn in December 2022 down from £4.3bn in November 2022 (see chart above). December’s flow was only 0.83x the pre-pandemic average flow of £3.9bn and below the recent March 2022 peak of £7.5bn (1.9x pre-pandemic flows).

Approvals for house purchase, and indicator of future borrowing, decreased to 35,600 in December 2022 from 46,200 in November. The latest approvals were the lowest since May 2022 and represent the fourth consecutive month of declines. It is reasonable, therefore, to expect lower UK flows in coming months.

Monthly mortgage flows – the EA details

**Monthly EA mortgage flows (EUR bn) and annual growth rate in outstanding stock (RHS)**
(Source: ECB; CMMP)

Monthly EA mortgage flows fell to €4.5bn in December 2022 from €8.9bn in November and €30.1bn in June 2022 (see chart above). December’s flow was only 0.4x the pre-pandemic average of €12.6bn and was the lowest monthly flow since March 2020 (€3.8bn) at the start of the pandemic.

Monthly mortgage flows – why the slowdown matters

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

“Synchronised slowdowns?”

Mortgage flows slowing at a faster rate in the EA than in the UK

The key chart

**Monthly mortgage flows (3m MVA) expressed as a multiple of pre-pandemic average flows** (Source: BoE, ECB; CMMP)

The key message

November 2022 monthly mortgage flows point to a synchronised slowdown in mortgage demand in the UK and EA, but with a sharper rate of decline in the EA (driven by German and French dynamics). Mortgage demand typically displays a co-incident relationship with GDP growth. In this context, turning points are more significant than the rate of change. The key message here relates more to a synchronised slowdown in economic activity in both regions, therefore, rather than “point-scoring” between them!

Synchronised slowdowns?

**Trends in UK monthly mortgage flow (£bn, LHS) and annual growth (% YoY, RHS)**
(Source: BoE; CMMP)

Monthly UK mortgage flows rose to £4.4bn in November 2022, up from £3.6bn in October 2022. While this is well below the recent peak flow of £17bn in June 2021, it is above the pre-pandemic average flow of £3.9bn.

According to the latest, Bank of England data release (4 January 2022), approvals for house purchase, an indicator of future borrowing, decreased from 57,900 in October 2022 to 46,100 in November 2022, the lowest level since June 2020. It is reasonable, therefore, to expect lower UK flows in coming months.

Mortgage flows are slowing at a faster rate in the EA than in the UK. The 3m MVA of monthly mortgage flows in the EA has fallen from 2.1x pre-pandemic flows in July 2022 to 0.9x pre-pandemic flows in November 2022 (see key chart above). In contrast, UK monthly flows remain above pre-pandemic levels on a monthly basis (1.1x) and a smoothed basis (1.2x).

Mortgage demand typically displays a co-incident relationship with GDP growth. In this context, turning points are more significant than the rate of change. So, as above, the key message here relates more to a synchronised slowdown in economic activity in both regions rather than “point-scoring” between them!

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