#uk – Page 5 – Chris Mallin Macro Perspectives

“Singing from the same song sheet”

Consistent messaging from the UK and EA money sectors

The key chart

**Consistent trends in broad money growth (% YoY)** (Source: BoE; ECB; CMMP)

The key message

UK and euro area (EA) money sectors have sent remarkably consistent messages throughout the COVID-pandemic. Shared trends in monetary aggregates, for example, provided similar conclusions regarding household (HH) behaviour, consumption and growth, the challenges facing policy makers, and the productivity of lending to the private sector (PSC).

The 4Q21 proved to be an important inflexion point in terms of HH confidence and behaviour in both regions. By December 2021, monthly deposit flows had moderated to 0.6x and 0.7x their pre-pandemic levels in the UK and EA respectively, leaving excess savings of c£162bn and c€285bn in the form of bank deposits. Demand for consumer credit recovered to 1.4% YoY and 1.2% YoY in the UK and EA respectively, and quarterly flows were positive in each of the past three quarters. So far, so good.

In addition to rising inflation, the Bank of England and the ECB both face on-going challenges in terms of the persistent desychronisation of money and credit cycles, which limits monetary policy effectiveness, and the fact that policy responses to date have fuelled growth in the wrong type of credit. The gap between the growth in money supply (ST liabilities of banks) and growth in PSC (key assets of banks) has narrowed but remains wide by historic standards. Nonetheless, the build-up of excess liquidity in both regions is slowing. Mortgage lending, the largest element of so-called “FIRE-based” lending, continues to be the main driver of PSC in the UK and the EA. This has potentially negative implications for growth, leverage, income inequality and financial stability.

In short, the money sectors in the UK and EA continue to sing from the same song sheet. The message for corporates, policy makers and investors alike is that an important inflexion point was reached in terms of HH confidence and behaviour in 4Q21. This is welcome news.

Of course, policy challenges remain and a slowdown in excess liquidity and/or a diversion into productive COCO-based lending rather than less productive FIRE-based lending may be less welcome news for financial assets in 2022.

Singing from the same song sheet

The money sectors in the UK and the euro area (EA) have sent remarkably consistent messages throughout the COVID-19 pandemic. We know that narrow money (M1), and overnight deposits within M1, drove the expansion of broad money (M4ex, M3 respectively) in both regions during 2020, for example. In other words, the rise in broad money illustrated in the chart above was a reflection of the deflationary forces of increased savings and delayed consumption.

We also know that, as at the end of December 2021, M1 represented 68% and 73% of M3 in the UK and the EA, up from 48% and 51% respectively a decade earlier (see chart below). Preference for highly liquid assets remains high, despite the negative real returns earned from those assets.

**Narrow money as a share of broad money since December 2011** (Source: BoE; ECB; CMMP)

A sustained recovery in both regions required/requires a reversal of these deflationary trends ie, a moderation in monthly HH deposit flows and a recovery in consumer credit (see “Three key charts for 2021”). Central banks also need to see a resynching of money and credit cycles. Why? Because, monetary policy effectiveness is based on certain stable relationships between monetary aggregates.

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

As noted in “Missing the point?” in December 2021, HH behaviour reached a potentially important inflexion point at the start of the 4Q21. Monthly deposit flows (see chart above) peaked at 5.9x pre-pandemic levels in the UK in May 2020 and 2.4x pre-pandemic levels in the EA in April 2020. In December 2021, these flows had moderated to 0.6x and 0.7x pre-pandemic levels respectively. During this process HHs have accumulated excess savings in the form of bank deposits of £162bn in the UK and €285bn in the EA (CMMP estimates).

**Growth rates (% YoY) in consumer credit** (Source: BoE; ECB; CMMP)

Annual growth rates in consumer credit reached a low point in February 2021 in both the UK (-10% YoY) and the EA (-3% YoY). In December 2021, however, annual growth rates had recovered to 1.4% YoY and 1.2% YoY respectively in the UK and EA respectively (see chart above). More importantly perhaps, quarterly flows of consumer credit have been positive and rising for the past three quarters (see chart below). The 4Q21 flows of £3bn and €4bn in the UK and EA respectively remain below pre-pandemic levels, however, especially in the EA where quarterly flows averaged €10bn during 2018-2019.

**Quarterly flows in consumer credit (£bn, EURO bn)** (Source: BoE; ECB; CMMP)

The COVID-19 pandemic exacerbated the desynchronisation of money and credit cycles in the UK and EA creating major challenges for policy makers, banks and investors alike. The degree of this desynchronisation peaked in early 2021 and reached its narrowest level since early 2020 in December 2021 (see chart below). That said, the gap between the growth rates of money supply (short-term liabilities of banks) and private sector lending (the main asset of banks) persists and remains high in a historic context.

**Growth in lending (% YoY) minus growth in money supply (% YoY)** (Source: BoE; ECB; CMMP)

Mortgage lending, the largest element of so-called “FIRE-based lending”, continues to be the main driver of PSC growth in both regions (see chart below). In December 2021, mortgage lending grew 5.1% YoY in the UK and 5.4% YoY in the EA. Lending to NFCs, the largest element of more productive “COCO-based lending”, rose 4.2% YoY in the EA but fell -0.4% YoY in the UK. As described above, consumer credit, another form of COCO-based lending grew 1.4% YoY and 1.2% YoY in the UK and EA respectively.

**Breakdown on PSC growth by type of lending (% YoY)** (Source: BoE; ECB; CMMP)

Conclusion

The money sectors in the UK and EA continue to sing from the same song sheet. The message for corporates, policy makers and investors alike is that an important inflexion point was reached in terms of HH confidence and behaviour in 4Q21. This is welcome news. Of course, policy challenges remain and a slowdown in excess liquidity and/or a diversion into productive COCO-based lending rather than less productive FIRE-based lending may be less welcome news for financial assets in 2022.

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

“Missing the point?”

Household behaviour at an inflection point

The key chart

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

The key message

The behaviour of UK and euro area households reached a potentially important inflexion point at the start of 4Q21. Household (HH) money flows moderated sharply in October 2021 while monthly flows of consumer credit hit new YTD highs.

Recall that HHs increased their money holdings significantly during the pandemic and built up (estimated) excess savings of £162bn in the UK and €285bn in the EA – a combination of forced and precautionary savings. This meant that the rise in broad money during the pandemic was a reflection of the deflationary forces of increased savings and delayed consumption.

The accumulation of money holdings peaked during 2Q20 and again in 4Q20 and the low point in terms of YoY declines in consumer credit demand was passed in February 2021. Monthly flows of consumer credit have been positive for the past six months and hit YTD highs in October 2021 in both regions. At the same time, the accumulation of money holdings has fallen back to 1.2x and 0.6x pre-pandemic levels in the UK and EA respectively.

Unfortunately, the recent rise in COVID-19 cases, the emergence of the omicron variant and renewed restrictions imposed by the UK and EA governments may result in these points being missed, or, worse still, the positive trends being reversed. That said, firmer economic foundations in both the UK and EA (and higher levels of vaccinations) suggest that both regions are in a stronger position to face renewed COVID challenges than they were a year ago.

Missing the point – the charts that matter

HH money flows

HHs in the UK and EA increased their money holdings significantly during the COVID-19 pandemic. Monthly flows peaked at 6x pre-pandemic levels in the UK in May 2020 (see chart above) and 2.4x pre-pandemic levels in the EA a month earlier (see chart below). At the start of 4Q21, they had moderated to 1.2x and 0.6x pre-pandemic levels in the UK and EA respectively. A key building block for a sustained economic recovery.

**Monthly HH deposit flows in the EA (EUR bn) and multiple (x) of 2019 average flow** (Source: ECB; CMMP)

Excess HH savings

In aggregate, and as a result, HHs have built up excess savings in the form of bank deposits of £162bn in the UK (see chart above) and €285bn in the EA (see chart below) since February 2020. These reflect a combination of forced savings (that may be released relatively quickly to support economic activity) and precautionary savings (that are unlikely to move straight into investment of consumption).

**Estimated build up of excess HH savings in the EA (EUR bn)** (Source: CMMP estimates)

As noted back in May (see “More bullish on UK consumption”) and confirmed by the ECB in August 2021 (see “Economic Bulletin, Issue 5”). The majority of these accumulated savings have accrued to HHs that already have sizeable savings, have higher incomes, and are older. Such HHs typically spend less from any extra savings they accumulate i.e. they have relatively low marginal propensities to consume. The release of these excess savings is likely to be only partial and gradual, therefore.

Impact on monetary aggregates

**M1 as a percentage of M3 in the UK and EA** (Source: BoE; ECB; CMMP)

HH behaviour had a marked impact on money supply dynamics during the pandemic with narrow money (M1) representing an ever-larger share of broad money (M3) in both the UK and EA (see chart above). As an example, overnight deposits contributed 6.8ppt to the total EA broad money growth of 7.6% in October 2021 alone (see chart below).

**Contribution of M1 (ppt) to growth rate in EA M3 (% YoY)** (Source: ECB; CMMP)

This matters because the expansion of broad money during the pandemic reflected the deflationary force of HHs increasing their savings and delaying consumption. Money sitting in overnight deposits contributes to neither growth nor inflation.

HH demand for consumer credit

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

Annual growth rates in consumer credit reached a low point in February 2021 in both the UK (-10% YoY) and the EA (-3% YoY). The rate of decline has narrowed subsequently to -1.0% in the UK in October. In the EA, annual growth rates turned positive two months later in April 2020 (see chart above).

**Monthly consumer credit flows in the UK (£ bn) and EA (EUR bn)** (Source: BoE; ECB; CMMP)

More importantly, monthly flows of consumer credit have been positive for the past six months and reached their highest levels YTD in both the UK (£0.7bn) and EA (€2.7bn) respectively (see chart above).

Conclusion

A moderation in monthly HH money flows and a recovery in demand for consumer credit represent important foundations for a sustained recovery in the UK and the EA. The rise in COVID-related risks comes at a very delicate and unfortunate time, therefore, for the recovery in both regions. It remains too early to say whether recent events will reverse these dynamics in a meaningful manner. The positive news is that firmer economic foundations in both the UK and EA suggest that both regions are in a stronger position to face these challenges than they were a year ago.

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.

“A return to abnormality”

Looking behind the OBR’s forecasts of improving UK government finances

The key chart

**Historic and forecast UK sectoral net lending – % GDP, rolling annual average** (Source: OBR; CMMP)

The key message

The OBR’s forecasts of a rapid improvement in UK government finances (the good news) assume unusual behaviour on the part of the UK private sector and the RoW and imply a “return to the abnormality” of sustained domestic UK deficits counterbalanced by significant and persistent current account deficits (the bad news). Viewed from a sector balances perspective, the risks appear tilted to the downside ie, government finances may not recover as quickly as forecast.

The OBR published its latest “Economic and fiscal outlook” on Wednesday, 27 October 2021. The Office recognised the positive impact of the UK government’s fiscal response in protecting household and corporate incomes during the pandemic and through 2021. Looking further forward, the OBR forecasts a rapid improvement in the government’s finances, with borrowing falling back below £100bn next year and stabilising around £44bn (<2% of GDP) in the medium term.

The forecasts assume certain behaviours from the other economic sectors, namely the domestic private sector (households and corporates) and the RoW. Under the latest forecasts, the UK household sector, which is typically a net saver, shifts (unusually) to a net deficit position over the forecast period. Given the high level of existing debt, this requires HHs to sustain historically low savings ratios of c.5%. The NFC sector, which is typically a net borrower, returns to a deficit position in 2Q22 and then runs relatively high deficits of c.3% of GDP over the rest of the period. To offset these twin domestic deficits, the RoW runs equal and historically high counterbalancing surpluses vis-à-vis the UK.

In short, the forecast improvements in UK government finances rely on dynamic adjustments by other economic sectors and unusual patterns of behaviour beyond that. This suggests obvious risks that the forecasts will not be met. Furthermore, the assumed end-result is one where sustained, twin domestic deficits are counterbalanced by “significant and persistent current account deficits. The OBR describes this as a “return to more normal levels”. CMMP analysis suggests it is anything but.

“Returning to abnormality”

The OBR published its latest “Economic and fiscal outlook” on Wednesday, 27 October 2021. The outlook sets out the Office’s forecasts for the economy and public finances to 2026-27 and provides an assessment of whether the Government is likely to achieve its fiscal targets.

**The impact of COVID on UK sectoral net lending postions – % GDP, rolling annual average** (Source: OBR; CMMP)

The OBR recognised the positive impact of the UK government’s fiscal response in ensuring that household (HH) and corporate (NFC) incomes did not fall “nearly as much as this expenditure or output” during the pandemic.

Government net borrowing rose to 12.5% of GDP in 2020, to pay for the fiscal support (see chart above). The HH net surplus rose to 7.8% of GDP, versus a 1Q04-1Q21 average of 2.5%. The NFC deficit moved into balance versus a 1Q04-1Q21 average deficit of -0.8% of GDP. Hence, the private sector’s net surplus rose to 7.8% of GDP versus a 1Q04-1Q21 average of 1.7% of GDP. These imbalances have persisted into 2021 as restrictions and support remained in place, albeit to a lesser degree.

**UK public sector net lending – % GDP, rolling annual average** (Source: OBR; CMMP)

Looking forward, the OBR forecasts a rapid improvement in the UK government’s financial position (see chart above, which compares the latest forecasts with the previous version), with borrowing falling “back below £100bn next year, declining more slowly thereafter to stabilise at around £44bn (1.5% of GDP) in the medium term.” Such and improvement would be sufficient for Rishi Sunak, the Chancellor of the Exchequer, to meet his fiscal target of getting “underlying debt falling as a share of GDP by the third year of our forecast (2024-25)”.

Domestic government balance + domestic private balance + foreign balance (must) = zero

These forecasts assume certain behaviours from the other economic sectors, namely the domestic private sector and the RoW. Recall that, from national accounting principles (see identity above), we know that the deficits run by one or more economic sectors must equal surpluses run by other sector(s).

**UK household sector net lending – % GDP, rolling annual average** (Source: OBR; CMMP)

Over the forecast period, the UK household sector, which is typically a net saver, shifts (unusually) to a net borrowing position. The OBR expects the HH net surplus to peak at 10% GDP in 1Q21, fall to 5.7% of GDP by 4Q21 and then (unusually) move into deficit by 4Q22 and for much of the forecast period out to 1Q27. Note that for any sector to run a deficit it must either increase its borrowing and/or reduce its accumulation of net financial assets.

**UK HH and NFC debt ratios – % GDP** (Source: BIS; CMMP)

Given the high level of HH debt, this requires HHs to sustain historically low savings ratios. At the end of 1Q21, the UK HH debt ratio was 91% of GDP, 6ppt above the BIS threshold limit and only 5ppt below its all-time high (see chart above). This suggests that HH are unlikely to increase borrowing levels significantly over the period.

Unsurprisingly, therefore, the OBR forecasts place a greater emphasis on HH savings. First, they assume that HHs will spend c.5% of the excess savings built up during the pandemic, a reasonable assumption. Second, and following on from this, they assume that the HH savings ratio will fall rapidly and stabilise at or around historic lows of c.5%, a more aggressive assumption (see chart below). History suggests that the risks to these assumptions lie clearly to the downside.

**Historic and forecast HH savings ratio** (Source: OBR; CMMP)

The NFC sector, which is typically a net borrower, returns to a deficit position in 2Q22 and then runs relatively high deficits of c.3% of GDP over the rest of the period (see chart below). This compares with a 1Q04-1Q21 average deficit of just under 1% of GDP. Again, given the current level of NFC borrowings the risks to these forecasts and to the level of NFC investment appear tilted to the downside.

**UK non-financial corporation sector net lending – % GDP, rolling annual average** (Source: OBR; CMMP)

To offset these twin domestic deficits, the RoW runs equal and historically high counterbalancing surpluses vis-à-vis the UK. The net surplus of the RoW is forecast to increase fro 3.3% of GDP currently (in-line with historic average) to 5.3% in early 2023 and then stabilise at c.4.5% for the rest of the forecast period. In other words, the UK is assumed to be increasingly reliant on the RoW as a net lender.

**RoW sector net lending – % GDP, rolling annual average** (Source: OBR; CMMP)

Conclusion

The forecast improvements in UK government finances rely on dynamic adjustments by other economic sectors and unusual patterns of behaviour beyond that. This suggests obvious risks that the forecasts will not be met.

Furthermore, the assumed end-result is one where sustained, twin domestic deficits are counterbalanced by “significant and persistent current account deficits. The OBR describes this as a “return to more normal levels”. CMMP analysis suggests it is anything but.

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

“Neither usual, nor sustainable”

What to look for in the OBR’s “Economic and Fiscal Outlook”

The key chart

**Actual and OBR forecasts for UK private and public sectoral net lending (% GDP)**
(Source: OBR; CMMP)

The key message

On Wednesday this week (27 October 2021), the OBR will publish its latest “Economic and fiscal outlook”. Among the 200+ pages of detailed analysis and forecasts, one page and one chart are key – “sectoral net lending” (typically around page 70!). This examines the impact of expected income and expenditure of the three economic sectors (private, public and RoW) for the path of each sector’s net lending to, or borrowing from, the others. A core element of CMMP analysis.

The previous outlook (March 2021) assumed that the two domestic sectors would return to running simultaneous net financial deficits in 2022 and described this situation as “more usual.” Of course, this is only possible if the RoW runs a compensating net financial surplus at the same time (ie current account surplus vis-à-vis the UK).

In short, existing official forecasts assume persistent and significant fiscal and current account deficits between 2022 and 2026. From a CMMP perspective, this is neither usual nor sustainable. Hence our attention will naturally focus on any revisions to these assumptions. Watch this space…

Neither usual, not sustainable

The OBR will publish its “Economic and fiscal outlook” (EFO) for the UK on Wednesday October 2021. The EFO sets out the Office’s forecasts for the economy and the public finances and provides an assessment of whether the Government is likely to achieve its fiscal targets. From a CMMP perspective, the key section is the one page summary of sectoral net lending. Specifically, the impact of expected income and expenditure of different economic sectors for the path of each sector’s net lending to, or borrowing from, the others.

For background, see “Everyone has one”

In the previous EFO (March 2021), the OBR argued that, “Over the medium term, sectoral lending positions return to more usual levels. As can be seen from the key chart above, this assumed that the two domestic sectors would both be running simultaneous net financial deficits (ie, both spending more than they earn). Note that, in the case of a simple two-sector economy, it would be impossible for the private and public sectors to be running deficits at the same time.

For background, see “Imbalances and dependencies”

**Actual and OBR forecasts for UK private and public and RoW sectoral net lending (% GDP)**
(Source: OBR; CMMP)

Of course, in practice the two domestic sectors are linked economically to foreign FIs, NFCs, HHs and governments, collectively termed the rest-of-the-world (RoW). From this, we can see that the previous OBR forecasts assume that the RoW would run compensating net financial surpluses (current account surpluses) vis-à-vis the UK domestic sectors.

For background, see “Where is the value…?”

In short, existing forecasts assume significant and persistent fiscal and current account deficits from 2022-2026. From a CMMP perspective, this is neither usual nor sustainable. Hence, our attention will naturally turn to the revised assumptions this week…

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

“Bashing the plastic?”

UK card payments trending below pre-pandemic levels

The key chart

**Aggregate card payments in relation to pre-pandemic levels** (Source: ONS; CMMP)

The key message

Despite accumulating close to £160bn in excess savings during the pandemic, UK households (HHs) appear reluctant to “bash their plastic”.

All categories of credit and debit card payments – delayable, social, staples and work-related – have recovered strongly during 2021. Unsurprisingly, the biggest increases have occurred in social and work-related payments with the easing/lifting of restrictions. Aggregate payments peaked at 106% of pre-pandemic levels on 5 May 2021, however, and have been trending slightly below pre-pandemic levels ever since.

HHs have been spending more on getting to work recently than on delayable items such as clothing and food, with the recent fuel shortages creating an additional, albeit temporary spike, in the former type of spending.

Significantly, delayable spending peaked at 121% of pre-pandemic levels a week after the lifting of restrictions on the opening of non-essential stores on 12 April 2021 and have fallen back to 92% of pre-pandemic levels now. This matters because spending on delayable goods is a useful indicator regarding the extent to which excess savings are returning to the economy via HH consumption in a sustained fashion.

The on-going message from the money sector here is that while the direction of travel in HH consumption has been positive YTD, momentum has slowed. This is consistent with historical evidence that suggests (1) that HHs take time to respond to shocks, (2) that unanticipated increases in HH wealth tend to be saved rather than spent; and (3) that excess savings were built up by HHs with relatively low marginal propensities to consume.

The six charts that matter

**CMMP estimates for excess HH savings built up during the pandemic** (Source: ONS; CMMP)

Despite accumulating close to £160bn in excess savings during the pandemic (see chart above), UK households (HHs) appear reluctant to “bash their plastic”.

**Card payments in relation to pre-pandemic levels by spending category** (Source: ONS; CMMP)

All categories of credit and debit card payments – delayable, social, staples and work-related – have recovered strongly during 2021 (see chart above). Unsurprisingly, the biggest increases have occurred in social and work-related payments with the easing/lifting of restrictions (see chart below).

**Change (ppt) in relative payments since end-2000 by category** (Source: ONS; CMMP)

Aggregate payments peaked at 106% of pre-pandemic levels on 5 May 2021, however, and have been trending slightly below pre-pandemic levels ever since (see chart below).

**Aggregate card payments in relation to pre-pandemic levels since end-2020** (Source: ONS; CMMP)

**Payments on delayable and work-related goods in relation to pre-pandemic levels** (Source: ONS; CMMP)

Significantly, delayable spending peaked at 121% of pre-pandemic levels a week after the lifting of restrictions on the opening of non-essential stores on 12 April 2021 and have fallen back to 92% of pre-pandemic levels now (see chart below). This matters because spending on delayable goods is a useful indicator regarding the extent to which excess savings are returning to the economy via HH consumption.

**Aggregate and delayable goods payments in relation to pre-pandemic levels** (Source: ONS; CMMP)

Conclusion

The on-going message from the money sector here is that, while the direction of travel in HH consumption has been positive YTD, momentum has slowed. This is consistent with historical evidence that suggests (1) that HHs take time to respond to shocks, (2) that unanticipated increases in HH wealth tend to be saved rather than spent; and (3) that excess savings were built up by HHs with relatively low marginal propensities to consume.

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

“Note to Rishi”

It’s the economy, not the budget, that has to balance

The key chart

UK financial sector balances (4Q rolling averages, £bn) (Source: ONS; CMMP)

The key message

Note to Rishi – a “pragmatic” and “responsible” fiscal outcome for the UK is one that delivers a balanced economy not a balanced budget.

Pre-COVID, the UK was running large and persistent sector imbalances and was increasingly reliant on the rest-of-the-world (RoW) as a net lender. The HH sector, which plays a critical role in the UK economy (FCE/GDP) and bank lending, had been funding consumption by dramatically reducing its savings rate and accumulation of net financial assets and was poised to disappoint.

In the face of the pandemic, the UK private sector shifted to an unprecedented net lending position of 21% GDP, 13ppt above the 4Q09 post-GFC peak. The HH sector alone moved from a net borrowing position of 0.4% GDP in 3Q19 to a net lending position of 15% GDP in 2Q20 as the HH savings ratio rose to a record high of 23% GDP. Extraordinary and co-ordinated responses to these extraordinary times came from the UK government and the Bank of England, including extensions to the furlough scheme and increases in the central bank’s buying programme. The responses were both timely and appropriate. The UK government increased its net borrowing positions to 25% GDP in 2Q20 and 14% in 3Q20.

According the latest ONS statistics, the net lending position of the UK private sector was still 6% GDP at the end of 2Q21, down from 10% in the previous quarter but still well above the LT (pre-COVID) average of just under 1% GDP. Both non-financial and financial corporations increased their net lending positions in 2Q21 to 1% of GDP respectively. In contrast, the HH’s net lending position fell from 9% GDP (£52bn) in 1Q21 to 5% GDP (£27bn) in 2Q driven by a recovery in spending. Note, however, that it remains double its LT average. On a positive note, the HH savings rate fell to 12% in 2Q21 from 18% in 1Q21 (the second highest rate on record).

The recent messages from the UK money sector suggest that HHs remain uncertain with monthly HH deposit flows rising again in August to double their pre-pandemic levels and demand for consumer credit remaining weak. So-called “faster-indicators” also indicate that credit and debit card payments remain below their pre-pandemic levels.

As the UK emerges from the COVID pandemic, large sector imbalances remain but in very different ways to the pre-COVID period. The private sector continues to disinvest, HHs remain uncertain and credit demand (ex-mortgages) remains subdued. UK HHs have built up c£160bn of excess savings during the pandemic but history suggests that (1) they take time to respond to shocks and (2) that unanticipated increases in wealth tend to be saved rather than spent. The co-ordinated fiscal and monetary policy response to the pandemic was timely and appropriate but it remains premature to be discussing significant fiscal adjustments and/or an end to “bigger government”.

Contrary to some of the current political rhetoric, budget outcomes are inappropriate goals in themselves. The correct budget outcome is the one that delivers a balanced economy, not a balanced budget.

“Note to Rishi” – the charts that matter

**UK financial sector balances – RoW deliberately shaded out!** (Source: ONS; CMMP)

Pre-COVID, the UK was running large and persistent sector imbalances and was increasingly reliant on the rest-of-the-world (RoW) as a net lender (see chart above). The HH sector, which plays a critical role in the UK economy (FCE/GDP) and bank lending, had been funding consumption by dramatically reducing its savings rate and accumulation of net financial assets and was poised to disappoint (see chart below).

**Poised to disappoint – HH gross savings and savings ratio** (Source: ONS; CMMP)

**Private sector net lending position as % GDP** (Source: ONS; CMMP)

In the face of the pandemic, the UK private sector shifted to an unprecedented net lending position of 21% GDP, 13ppt above the 4Q09 post-GFC peak (see chart above). The HH sector alone moved from a net borrowing position of 0.4% GDP in 3Q19 to a net lending position of 15% GDP in 2Q20 as the HH savings ratio rose to a record high of 23% GDP (see chart below).

**A record high in HH savings** (Source: ONS; CMMP)

Extraordinary and co-ordinated responses to these extraordinary times came from the UK government and the Bank of England, including extensions to the furlough scheme and increases in the central bank’s buying programme. The responses were both timely and appropriate (see chart below). The UK government increased its net borrowing positions to 25% GDP in 2Q20 and 14% in 3Q20.

**UK policy responses from a sector balances perspective** (Source: ONS; CMMP)

**Breakdown of private sector net financial balances** (Source: ONS; CMMP)

In contrast, the HH’s net lending position fell from 9% GDP (£52bn) in 1Q21 to 5% GDP (£27bn) in 2Q driven by a recovery in spending. Note, however, that it remains double its LT average (see chart below). On a positive note, the HH savings rate fell to 12% in 2Q21 from 18% in 1Q21 (the second highest rate on record). The recent messages from the UK money sector suggest that HHs remain uncertain with monthly HH deposit flows rising again in August to double their pre-pandemic levels and demand for consumer credit remaining weak. So-called “faster-indicators” also indicate that credit and debit card payments remain below their pre-pandemic levels.

**HH sector net lending position** (Source: ONS; CMMP)

Conclusion

The co-ordinated fiscal and monetary policy response to the pandemic was timely and appropriate but it remains premature to be discussing significant fiscal adjustments and/or an end to “bigger government”. Contrary to some of the current political rhetoric, budget outcomes are inappropriate goals in themselves. The correct budget outcome is the one that delivers a balanced economy, not a balanced budget.

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

“Delaying the delayable”

Faster indicators support a “slowing UK momentum” narrative

The key chart

**Work-related and delayable card payments versus pre-pandemic levels** (Source: ONS; CMMP)

The key message

UK households are delaying spending on so-called “delayable goods” such as clothing and furniture. This matters because this form of spending is a useful indicator of the extent to which the c. £150bn excess savings built up during the pandemic is returning to the UK economy via consumption in a sustained fashion.

Delayable purchases recovered strongly following the re-opening of non-essential stores (12 April) to reach 122% (19 April) and 112% (5 May) of pre-pandemic levels. The latest ONS data release indicates that they fell back to 86% of pre-pandemic levels in the week to 9 September 2021, however (see chart above).

While all forms of credit and debit card spending have recovered from their 2021 lows, only spending on staples and work-related purchases are above pre-pandemic levels (see chart below).

In short, households are spending more in returning to work but the wider message from faster-indicators supports a “slowing UK momentum” narrative.

**Credit and debit card payments versus pre-pandemic levels by type** (Source: ONS; CMMP)

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

“Rolling over?”

What does the slowdown in UK monetary aggregates mean?

The key chart

**Growth (% YoY) in money (M4ex) and lending (M4Lex) over past decade** (Source: BoE; CMMP)

The key message

Financial markets are typically sensitive to inflexion points and UK monetary aggregates are “rolling over”. Among the mixed messages, there is the overriding sense of slowing momentum with obvious risks to a sustained recovery and reflation trades.

The expansion in broad money during the pandemic reflected deflationary forces as uncertain households increased their money holdings and delayed consumption. Monthly money flows are moderating now (positive news) but remain elevated in relation to pre-pandemic levels and in relation to euro area dynamics. Growth in consumer credit remains weak in absolute terms (with the exception of niche areas such as the used-car market) again in contrast to EA dynamics. The gap between money growth and credit demand has narrowed from recent highs but remains significant, presenting on-going challenges to policy makers in both regions. The real surprise in July’s UK money supply data, however, was the £1.4bn repayment of mortgage debt, compounded by a slowdown in mortgage approvals.

The overriding message from the rolling over of UK monetary aggregates is one of slowing momentum. So-called “faster indicators” are sending the same message for August too. Uncertainty may be lower than during the height of the pandemic, but any recovery is gradual at best. Sustained recoveries and reflation trades in both the UK and the EA require more substantial foundations.

Rolling over – in charts

UK monetary aggregates are rolling over sending mixed messages to economists, strategists and investors alike (see key chart above). Growth in sterling money (M4ex) slowed to 7.9% YoY in July 2021, down from 8.8% in June 2021 and from February 2021’s recent peak of 15.3%. Growth in sterling net lending (M4Lex) slowed to 1.8% YoY in July 2021, down from 2.4% in June and from its earlier March 2020 peak of 6.6% (the “dash-for-cash”).

**Synchronised UK and EA money cycles** (Source: BoE; ECB; CMMP)

Money cycles in the UK and the EA remain highly synchronised with broad money growth peaking in February 2021 and January 2021 in the UK and EA respectively (see chart above).

**M1 as a percentage of EA and UK broad money** (Source: BoE; ECB; CMMP)

The expansion in UK and euro area (EA) broad money during the pandemic reflected deflationary forces as uncertain households increased their money holdings despite earning negative real returns and delayed consumption. Growth in narrow money (and in overnight deposits within narrow money) is the main driver of broad money growth in both regions. Narrow money accounts for 68% and 72% of broad money (M3) in the UK and EA respectively, the highest market shares in both cases. As can be seen in the chart above, the COVID-19 pandemic accelerated the pre-existing trends towards holding liquid assets. The key point here being that money sitting in overnight deposits contributes to neither economic growth nor inflation.

**UK monthly HH money flows (£bn) since January 2019** (Source: BoE; CMMP)

Monthly money flows are moderating but remain elevated in relation to pre-pandemic levels and in relation to euro area dynamics. Monthly flows of HH money holdings since March 2020 have far exceeded pre-COVID levels. The two peaks seen in the chart above show monthly flows at 5.9x (May 2020) and 4.4x (December 2020) pre-COVID levels. The chart also illustrates how these flows have followed the timings of lockdowns closely indicating a combination of forced and precautionary savings.

**UK and EA money flows as a multiple of pre-COVID levels** (Source: BoE; ECB; CMMP)

Uncertainty levels have peaked in both regions but UK monthly flows are still 1.5x pre-pandemic levels. A moderation on HH money flows was the first of three key signals from the money sector identified at the start of this year. As can be seen in the chart above, the UK is lagging the EA in terms of a return to normality in this context. Monthly HH deposit flows in the EA have been at or below pre-COVID levels since April 2021.

**Monthly flows (%, LHS) and growth rate (% YoY, RHS) in consumer credit** (Source: BoE; CMMP)

Growth in consumer credit remains weak with the exception of niche areas such as the used-car market. UK individuals borrowed no additional consumer credit in July 2021. The Bank of England noted that, “Within this, they borrowed an additional £0.1bn in ‘other’ forms of consumer credit (such as car dealership finance and personal loans), offset by net credit card repayments of £0.1bn.” (Money and Credit, July 2021).

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

The annual growth rate in consumer credit also remained weak, decreasing to -2.7% YoY in July from -2.2% YoY in June. Here again the UK is lagging the EA in terms of a return to normality (key signal #2). The YoY growth rate in consumer credit turned positive in the EA in April 2021 and has average 0.5% since then (see chart above).

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

The gap between money growth and credit demand has narrowed from recent highs but remains significant, presenting on-going challenges to policy makers (key signal #3). The ideal scenario would see a reduction in the deflationary forces that drove M3 growth during the pandemic combined with a recovery in (productive) lending to the private sector. The peak UK gap (11.4ppt) occurred in February 2021 when money supply increased by 15.3% YoY while lending grew by only 3.9% YoY. The gap narrowed to 6.1ppt in July 2021. Money supply growth slowed to 7.9% YoY but lending has also slowed to 1.8%. As can be seen from the chart above the same dynamics can be observed in both the UK and the EA.

**Monthly UK retail lending flows (£bn) and breakdown** (Source: BoE; CMMP)

The real surprise in July’s UK money supply data was the £1.4bn repayment of mortgage debt compounded by a slowdown in mortgage approvals. Resilient mortgage demand had been the key feature of UK retail finance during the pandemic, offsetting weakness in consumer credit (see chart above). In July 2021, however, HHs repaid £1.4bn of mortgage debt (red data labels in chart above). This is only the second recorded net repayment in the past decade. It followed record £18bn borrowing in June, which was boosted by the tapering off of the stamp duty holiday. Looking forward, approvals for house purchases, an indicator of future borrowing trends, fell to 75,200, the lowest level since July 2020 but above pre-pandemic levels (see chart below).

**UK approvals for house purchases** (Source: BoE; CMMP)

Conclusion

Financial markets are typically sensitive to inflexion points. The overriding message from the rolling over of UK monetary aggregates is one of slowing momentum. So-called “faster indicators” are sending the same message for August (see chart below).

**Aggregate card spending versus pre-COVID levels** (Source: ONS; CMMP)

Uncertainty may be lower than during the height of the pandemic, but any recovery is gradual at best. Sustained recoveries and reflation trades in both the UK and the EA require more substantial foundations.

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

“Euro area leads the UK”

Money cycles remain synchronised, but the EA is leading the transition to normality

The key chart

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

The key message

The UK and EA money cycles remain highly synchronised but the UK is lagging the EA in terms of the phased, steady return to normality.

Narrow money drove the expansion of broad money in both cases during the pandemic, reflecting the DEFLATIONARY forces of heightened uncertainty, increased savings, reduced consumption and relatively subdued demand for credit.

Among the key signals indicating a return to normality are (1) a moderation in household deposit flows, (2) a recovery in consumer credit, and (3) a resynching of money and credit cycles.

Monthly HH deposit flows/uncertainty levels have peaked in the UK and the EA, but while June 2021’s monthly flows in the EA were slightly below pre-pandemic levels, UK flows (£10bn) remained double the pre-pandemic average. According to CMMP estimates, excess HH savings in the UK have now reached over £150bn at the end of 1H21 (below official forecasts of £160bn).

Monthly consumer credit flows have turned positive in both the UK and the EA. However, while YoY growth rates turned positive in April in the EA they remain negative (-2.2%) in the UK.

The desynchronization of money and credit cycles during the pandemic has created challenges for policy makers and bankers alike. The growth in the supply of money exceeded the growth in private sector credit by record amounts during Phase 2 of the pandemic. The gap between them peaked at 11ppt in the UK (February 2021) and 8ppt in the EA (January 2021). At the end of the 2Q21, the gaps remained at 6.4ppt in the UK and 5.3ppt in the EA. Narrower than before but still very wide in a historic context.

In previous posts, I cautioned about confusing the messages from the money sector and suggested that reflation trades needed refuelling. As we enter 2H21, it remains important to understand the messages from the money sector correctly.

Falling growth rates in broad money reflect a moderation in deflationary forces primarily. Both the UK and EA are transitioning towards a steady recovery phase albeit at a different pace. The level of HH excess savings in the UK suggests a higher gearing towards a recover in HH consumption but, to date, the EA is leading the transition.

EA leads the UK – in charts

**Trends in monthly HH deposit flows since January 2019** (Source: BoE; ECB; CMMP)

Monthly HH deposit flows/uncertainty levels have peaked in the UK and the EA, but while June 2021’s monthly flows in the EA were slightly below pre-pandemic levels, UK flows (£10bn) remained double the pre-pandemic average of £5bn (see chart above). According to CMMP estimates, excess HH savings in the UK have now reached over £150bn at the end of 1H21 (below official forecasts of £160bn).

**Trends in monthly consumer credit flows** (Source: BoE; ECB; CMMP)

Monthly consumer credit flows have turned positive in both the UK and the EA (see chart above). However, while YoY growth rates turned positive in April in the EA they remain negative (-2.2%) in the UK (see chart below).

**YoY growth in consumer credit since 2016** (Source: BoE; ECB; CMMP)

**Growth in lending minus growth in money supply since 2011** (Source: BoE; ECB; CMMP)

Conclusion

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