Trends in weekly card payments versus pre-COVID levels (Source: ONS; CMMP)
The key message
In April 2021, I argued that investment narratives, like endurance athletes, require constant refuelling but that it was too early to expect much “refuelling” in terms of the key signals for 2021. This has been true for the UK where the direction of travel has been positive but the pace of travel has been disappointing in relation to trends observed in the euro area (EA).
Monthly flows in household (HH) money, a useful indicator of household uncertainty, have followed the timing of lockdown restrictions closely. They have fallen from £21bn in December 2020 to £7bn in May 2021 but remain 1.5x the average pre-COVID pandemic monthly flows.
CMMP analysis suggests that “excess savings” built up during the pandemic have reached £144bn (slightly below official estimates) or £137bn if a slightly higher level of precautionary savings are maintained. History reminds us that it takes time for excess savings or unanticipated sources of wealth to return in the form of consumption, however. For the first time since August 2020, UK consumers borrowed more than they paid off in May 2020 (£0.3bn) but the annual growth rate remained weak (-3.2% YoY).
So-called “faster indicators” such as UK spending on debit and credit cards send the same message. Spending continues to recover but remains below pre-pandemic levels. UK HHs are increasing spending on getting to work but spending on “delayable” goods has lost some momentum and remains below pre-COVID levels. This morning (9 July 2020), ONS statistics show GDP growing 0.8% in May 2021, the fourth consecutive month of growth, but below expectations and 3.1% below pre-COVID levels.
The UK reflation trade is in need of more sustained refuelling…
The key message in six charts
Monthly flows of HH money holding since January 2019 (Source: BoE; CMMP)CMMP estimates of build up of “excess savings” during the COVID-19 pandemic (Source: BoE, CMMP)Trends in UK consumer credit since January 2020 (Source: BoE; CMMP)Aggregate weekly card payments in 2021 versus pre-COVID levels (Source: ONS; CMMP)Card payments versus pre-COVID levels by type of spending (Source: ONS; CMMP)ONS estimates for monthly GDP, 2018 = 100 (Source: ONS; CMMP)
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
What are the key messages behind the headline numbers? (Source: BoE; ECB; CMMP)
The key message
The EA may be leading the UK in a steady and synchronised recovery but this is not the time to repeat the post-GFC policy mistakes.
What are the euro area (EA) and UK money sectors telling us about the nature of the recovery from the COVID-19 pandemic?
The deflationary forces that drove the acceleration in broad money during the pandemic have peaked. Household (HH) uncertainly is falling, especially in the EA (key signal #1). Monthly flows in consumer credit were positive in May in both regions and the EA registered positive YoY growth in consumer credit for the second month running (key signal #2).The gap between lending growth and money growth is narrowing from recent record highs but both regions remain a long way from normalised money and credit cycles (key signal #3).
The 2Q21 message from the money sector is clear – the EA is leading the UK in a steady and synchronised recovery from the COVID-19 pandemic (so far), but with a challenging policy context looking forward. The comments from ECB Executive Board member, Fabio Panetta, that, “Combined fiscal and monetary support has lifted the economy out of the state of the emergency” appear well founded in this context.
The tentative nature of the recovery to date places even more importance on Panetta’s conclusion that, “We cannot waste the opportunity of having, for the first time in more than a decade, a combination of expansionary monetary and fiscal policies and a global reflationary environment to re-anchor inflation expectations to our target.”
This is not the time to repeat the post-GFC policy mistakes.
2Q21 messages from the money sectors
M3 increasingly driven by M1 or narrow money (Source: BoE; ECB; CMMP)
The deflationary forces that drove the acceleration in broad money during the pandemic have peaked. As can be seen in the chart above, narrow money (notes and coins in circulation and overnight deposits, or M1) represents an increasingly large proportion of broad money (M3) in both regions.
In May 2021, M1 accounted for 72% and 68% of M3 in the EA and UK respectively. This compares with 45% and 47% respectively in May 2009 and the GFC period. The key point here is that money sitting idly in overnight deposits contributes to neither growth nor inflation.
Different drivers, different implications (Source: ECB; CMMP)
As noted in previous posts (see “Don’t confuse the message”), it is important not to confuse the messages from the pre-GFC and COVID-19 periods of broad money expansion (see EA chart above). The message from the former period was one of over-confidence (low M1 contribution) and excess credit demand (high PSC contribution). In contrast, the recent message has been one of heightened uncertainty (high M1 contribution) and subdued credit demand (low PSC contribution). In short, recent money growth reflects fiscal and monetary easing in response to weak private sector demand and rising savings (with the added uncertainty regarding the extent to which rising savings are forced or precautionary).
Key signal #1 revisited
Trends in monthly HH deposit flows since January 2019 (Source: BoE; ECB; CMMP)
HH uncertainly is falling, especially in the EA (key signal #1). Monthly HH deposit flows are moderating in both regions. During the pandemic, HHs in both regions increased their money holdings despite earning negative returns – a combination of forced and precautionary savings. At their respective peaks, monthly flows were 2.4x (March 2020) and 6.0x (May 2020) their pre-Covid levels in the EA and UK respectively (see chart above).
In the EA, monthly flows were €31bn in May (up from €20bn in April) compared to the €33bn average flows seen during 2019. This was the second consecutive month when monthly flows were below their pre-COVID levels. In the UK, monthly flows were £7bn in May 2021, down from £9bn in April 2021, but still 1.5x their 2019 average of £5bn.
Key signal #2 revisited
Trends in monthly consumer credit flows since January 2020 (Source: BoE; ECB; CMMP)YoY growth in consumer credit over past five years (Source: BoE; ECB; CMMP)
Monthly flows in consumer credit were positive in May in both regions and the EA registered (slightly) positive YoY growth in consumer credit for the second month running (key signal #2).
HHs in the EA and UK borrowed €1.5bn and £0.3bn as consumer credit respectively in May 2021. This is the first time since August 2020 that UK consumers have borrowed more than they paid off. The Bank of England reported that this increase reflected £0.4bn in “other” forms of consumer credit such as card dealership finance and personal loans. In contrast, credit card lending remained weak with a net repayment of £0.1bn.
The EA has registered growth rates of 0.3% and 0.6% YoY in April and May 2021. In the UK, consumer credit fell -3.2% from -5.7% in April and the historic low of -10% in February 2021.
Key signal #3 revisited
Growth in lending minus growth in money suppy since April 2011 (Source: BoE; ECB; CMMP)
The gap between lending growth and money growth is narrowing from recent record highs but both regions remain a long way from having normalised money and credit cycles (key signal #3).
Recall that in typical cycles, monetary aggregates and their key counterparts (eg credit to the private sector) move together. Money supply indicates how much money is available for use by the private sector. Private sector credit indicates how much the private sector is actually borrowing.
The gap has narrowed to 5.7ppt in the EA and 6.9ppt in the UK from recent, record highs of 8ppt (January 2021) and 11.4ppt (February 2021) respectively. This narrowing reflects a slowdown in both money supply and private sector credit, especially in the NFC sector.
Note that: (1) the effectiveness of monetary policy relies, in part, on certain stable relationships between monetary aggregates and their counterparts; and (2) that the desynchronization of money and credit cycles during the pandemic was unprecedented in both the EA and the UK.
Trends in lending by type since May 2019 (Source: BoE; ECB; CMMP)
Conclusion
The 2Q21 message from the money sector is clear – the EA is leading the UK in a steady and synchronised recovery from the COVID-19 pandemic (so far), but with a challenging policy context looking forward.
In this context, the comments from ECB Executive Board member, Fabio Panetta, that, “Combined fiscal and monetary support has lifted the economy out of the state of the emergency” appear well founded.
The tentative nature of the recovery to date places even more importance on Panetta’s conclusion that, “We cannot waste the opportunity of having, for the first time in more than a decade, a combination of expansionary monetary and fiscal policies and a global reflationary environment to re-anchor inflation expectations to our target.”
This is not the time to repeat the post-GFC policy mistakes.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
Aggregate weekly card payments in 2021 versus pre-COVID levels (Source: ONS; CMMP)
The key message
Are UK consumers merely forming orderly queues or is the recovery in consumption stalling already?
Aggregate card purchases have fallen back from the recent peak of 106% pre-COVID spending (5 May 2021) to 90% pre-Covid spending according to the latest ONS “experimental faster indicators“.
Spending across all categories is higher than at the start of the year although aggregate, delayable and social spending all remain below pre-Covid levels. With the exception of staples, all consumption categories have seen an increase in spending since the period before restrictions on the opening of non-essential stores were eased on 12 April. The largest increases over this period have been in work-related (25ppt) and delayable spending (22pt).
Spending on delayable goods (eg, clothing, furniture) 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 consumption. These purchases recovered strongly to reach a YTD high of 122% pre-COVID spending on 19 April. Momentum has slowed since then, however, with the latest data indicating delayable spending at only 84% of pre-COVID levels.
As before, the ONS’ real time indicators continue to a point to a steady recovery in UK credit and debit card purchases. At the same time, they are likely to disappoint those hoping for a more rapid recovery in consumption. As equity markets have transitioned from their “hope” to “growth” phases, much of the expected future growth in cash flows has been paid for already. A next leg may require more concrete evidence of sustained growth in consumption.
Forming an orderly queue…?
Aggregate card purchases in the UK have fallen back from their 5 May 2021 peak of 106% pre-COVID spending to 90% in the week to 17 June 2021 (see key chart above). All spending categories with the exception of “work-related” spending decreased over the latest weekly period. The data series shown here is part of the ONS’ “experimental faster indicators” for estimating UK spending on credit and debit cards, which track daily CHAPS payments by credit and debt card payment processors to around 100 major UK retail outlets.
Card payments versus pre-COVID levels by type of spending (Source: ONS; CMMP)
Spending across all categories (delayable, social, staple, and work-related) is higher than at the start of the year. The largest increases in spending have been in work-related (57ppt), social (34ppt) and delayable (30ppt) goods. Aggregate, delayable and social spending all remain below pre-COVID levels, however (see chart above).
Card spending by type since relaxation of restrictions on store openings (Source: ONS; CMM)
With the exception of staples, all consumption categories have seen an increase in spending since the period before restrictions on the opening of non-essential stores were eased on 12 April (see chart above). The largest increases over this period have been in work-related (25ppt) and delayable spending (22pt).
Recent trends in aggregate card spending and spending on delayable goods (Source: ONS; CMMP)
Conclusion
As before, the ONS’ real time indicators continue to a point to a steady recovery in UK credit and debit card purchases. At the same time, they are likely to disappoint those hoping for a more rapid recovery in UK consumption.
In May, I suggested that, “As equity markets transition between their “hope” and “growth” phases, investors who have already paid for expected future growth may well pause at this stage and wait for more concrete evidence of a sustained recovery”. The UK narrative remains the same.
UK spending recovery is steady rather than dramatic
The key chart
Aggregate credit and debit card purchases versus February 2020 (pre-COVID) average (Source: ONS; CMMP)
The key message
ONS real-time indicators continue to point to a steady recovery in UK credit and debit card purchases but may disappoint those hoping for a rapid recovery in consumption.
The charts that matter
Aggregate card purchases fell from 106% of average February 2020 spending (pre-Covid) on 5 May 2021 to 95% on 27 May 2021 (see key chart above). Spending on so-called “delayable” and “staple” goods also fell during May (MTD). In contrast, “social” spending rose from 76% to 85% and “work-related” spending increased from 100% to 104%.
May 2021 versus the start of the year – a recovery across the board (Source: ONS; CMMP)
Spending across all categories is higher in relation to pre-COVID levels than in January 2021 but only staples and work-related spending are above pre-COVID levels (see chart above).
CMMP estimates of excess HH savings built up during the COVID-19 pandemic (Source: CMMP)
Spending on delayable goods (eg, clothing, furniture) is a useful indicator of the extent to which the c.£160bn of excess savings built up during the pandemic (see chart above) is returning to the economy via consumption.
Recovery in delayable spending has lost momentum (Source: ONS; CMMP)
These purchases recovered strongly following the reopening on non-essential stores (12 April) to reach recent highs of 122% (19 April) and 112% (5 May) of pre-COVID spending. Momentum has slowed since then, however, with the latest data indicating delayable spending at 91% of pre-COVID levels (see chart above).
Change in index of card purchases YTD (Source: ONS; CMMP)
It is reasonable to expect volatility in faster-indicators and dangerous, therefore, to draw too many conclusions from short-term movements. The core message remains that the consumption is recovering but at a steady rather than rapid pace. Unsurprisingly, the strongest recovery YTD has been in work related spending (see chart above).
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
Synchronised messages from the UK and EA money sectors
The key chart
Don’t misread the messages from macro variables – this is an atypical cycle (Source: BoE; ECB; CMMP)
The key message
It is important not to confuse the decline and recovery in economic activity over the past twelve months with typical economic cycles.
Headline growth figures in key macro variables, including monetary aggregates, have been open to misinterpretation, leading to many false narratives regarding their implications for investment decisions and asset allocation. In this context, CMMP analysis has gone beyond the headlines to identify three key signals that help to interpret current trends in the UK and EA effectively. These signals focus on HH behaviour, the consumption/growth outlook and the policy context.
The messages from the UK and EA money sectors are remarkably consistent in direction if not in magnitude.
Monthly HH deposit flows are moderating in both regions (key signal #1), especially in the EA, suggesting that uncertainty levels are falling. That said, HHs are still repaying down consumer credit (key signal #2), albeit at a slower pace (n.b. the YoY growth rate in consumer credit turned positive in the EA for the first time since last summer). Policy makers still face considerable challenges due to the on-going desynchronization of money and credit cycles, however (key signal #3). The resilience in mortgage demand and on-going house price rises bring additional challenges that complicate policy choices further.
Sustained recoveries require further moderations in HH deposit flows, a recovery in consumer credit, and a resynchronisation in money and credit cycles. The UK displays higher gearing than the EA to each of these key drivers but is lagging the EA in terms of positive signals so far…
Consistent messaging through atypical cycles
The UK and euro area (EA) money sectors have provided consistent messages regarding household (HH) behaviour, the consumption/growth outlook and the policy context in their respective regions throughout the COVID-19 pandemic.
HH monthly money flows as a multiple of 2019 average monthly flows (Source: BoE; ECB; CMMP)
Monthly HH deposit flows provide important insights into HH behaviour. During the pandemic, HHs in both regions increased their money holdings at elevated rates, despite earning negative returns. This behaviour contributed to neither growth nor inflation.
Deposit flows declined in both regions at the start of 2Q21 (see chart above). In the EA, monthly flows fell to €19bn in April 2021 from €62bn in March 2021. This is the first time since March 2020 that these flows have fallen below the €33bn average monthly flows seen during 2019. In the UK, monthly flows fell to £11bn in April 2021 from £16bn in March 2021, the smallest net flow since September 2020. While the direction of travel is the same in both regions, monthly money flows in the UK remain 2.3x above their 2019 average of £5bn.
YoY growth rates in consumer credit (Source: BoE; ECB; CMMP)
While uncertainty is falling in both regions, consumption remains subdued. On a positive note, the YoY growth rate in consumer credit in the EA turned positive (0.3%) for the first time since August 2020 (see chart above). In contrast, growth remained negative in the UK (-5.7%) albeit less negative than the historic low of -10% recorded in February 2021.
That said HHs in both regions repaid consumer credit during April 2021 (see chart below). While this is not a positive signal for growth, the scale of repayments is slowing at least. In the UK, for example, net repayments of £0.4bn was less than seen on average each month over the previous year (£1.7bn).
Monthly flows in UK and EA consumer credit (Source: BoE; ECB; CMMP)
The policy context remains challenging, however, especially for central bankers. The effectiveness of monetary policy relies, in part, on certain stable relationships between monetary aggregates. The desynchronization of money and credit cycles during the pandemic was unprecedented in both the UK and the EA.
Trends in the gap between growth in lending and growth in money supply (Source: BoE; ECB; CMMP)
The gap between YoY growth rates in private sector lending and money supply hit historic highs of 11ppt in the UK in February 2021 and 8ppt in the EA in January 2021. These gaps narrowed to 9ppt and 6ppt respectively in April. Nevertheless, they remain very wide in a historic context (see chart above).
Conclusion
To repeat, it is important not to confuse the decline and recovery in economic activity over the past twelve months with typical economic cycles.
The messages from the UK and EA money sectors are remarkable consistent in direction if not in magnitude. Monthly HH deposit flows are moderating (key signal #1), especially in the EA, suggesting that uncertainty levels are falling. That said, HHs are still repaying down consumer credit (key signal #2), albeit at a slower pace (and the YoY growth rate in consumer credit turned positive in the EA for the first time since last summer). Policy makers still face considerable challenges due to the on-going desynchronization of money and credit cycles, however. The resilience in mortgage demand and on-going house price rises bring additional challenges that complicate policy choices further.
Sustained recoveries require further moderations in HH deposit flows, a recovery in consumer credit, and a resynchronisation in money and credit cycles. The UK displays higher gearing than the EA to each of these key drivers but is lagging the EA in terms of positive signals so far…
Please note that the summary comments and charts above are summaries from more detailed analysis that is available separately.
Faster indicators vs. key signals from the UK money sector
The key chart
Change (ppt) in credit and debt card spending versus February 2020 levels (Source: ONS; CMMP)
The key message
Investment narratives, like endurance athletes, require consistent refuelling to sustain their performance particularly as they transition between phases in market cycles. It may take some time before the three key signals for 2021 – a moderation in household savings, a recovery in consumer credit, and a re-synching of money and credit cycles – provide sustained nourishment. In the meantime, so-called “faster indicators” such as estimates for UK spending on credit and debit cards take on greater prominence.
These indicators show a steady increase in spending since the start of the year led by a recovery in spending at stores selling “work-related” and “delayable” goods and services. The latest data release from the ONS (27 May 2020) indicates a loss of momentum in this recovery, however, particularly in the case of delayable goods. With the exception of spending on “staples”, credit and debit card purchases have fallen back/remain below their pre-COVID levels.
The risk with volatile data series (such as faster indicators) is that short term “sugar rushes” are mistaken for more sustainable nourishment. The direction of travel is clearly positive but the recovery in UK consumption remains tentative still. As equity markets transition between their “hope” and “growth” phases, investors who have already paid for expected future growth in cash flows may well pause at this stage and wait for more concrete evidence of sustained growth…
Sugar rushes vs sustained nourishment
Recovery in spending YTD (ppt) versus February 2020 levels (Source: ONS; CMMP)
UK spending on debit and credit cards has increased steadily since the start of the year led by a recovery in “work-related” and “delayable” spending. In the week to 20 May 2021, the aggregate CHAPS-based indicator of credit and debit card purchases was at 96% of its pre-COVID, February 2020 average. This represents a 31ppt increase since early January 2021. The largest increases in spending over this period have been seen in “work-related” spending (eg, public transport, petrol) which has risen 45ppt and in “delayable” spending (eg, clothing, furnishings) which has risen 41ppt (see chart above).
Recent trends in aggregate and delyable spending showing impact of store reopening on 12 April (Source: ONS; CMMP)
The latest data release from the ONS (27 May 2021) indicates a loss of momentum in this recovery, however, particularly in the case of delayable goods. Aggregate spending peaked at 106% of February 2020 levels in the week to 5 May 2021 and has fallen back to 96% in the week to 20 May 2021. Spending on delayable goods rose sharply in April following the reopening of non-essential retail stores (12 April 2021). In the following week, spending was 22ppt above the February 2020 levels and remained above them until the week to 11 May 2021. Since then, it have fall back to 94% in the week to 20 May 2021.
Where are we now? Spending versus February 2020 levels (Source: ONS; CMMP)
With the exception of spending on “staples”, purchases have fallen back/remain below their pre-COVID levels. Other data sources (eg, Barclaycard payments data) indicate an immediate boost in spending in the hospitality sector following the relaxation of lockdown restrictions on 17 May 2021 but these trends are only partially captured here and social spending remained 16ppt below February 2020 levels in the week to 20 May 2021. Aggregate, delayable and work-related spending remain 4ppt, 6ppt and 1ppt below February 2020 levels respectively.
Conclusion
The risk with volatile data series (such as faster indicators) is that short term “sugar rushes” are mistaken for more sustainable trends. The direction of travel is clearly positive but the recovery in UK consumption remains tentative still. As equity markets transition between their “hope” and “growth” phases, investors who have already paid for expected future growth in cash flows may well pause at this stage and wait for more concrete evidence of sustained growth…
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
UK consumers are spending on “delayable” goods again
The key chart
Credit and debit card payments versus pre-COVID levels by type of spending (Source: ONS; CMMP)
The key message
In my previous post, “More bullish on UK consumption”, I highlighted potentially good news for UK suppliers of consumer durables. The latest data on UK spending on credit and debit cards provides further support.
At the end of 1Q21, credit and debit card purchases of so-called “delayable” goods were still 31% below the average levels recorded in February 2020 (“pre-COVID”). These purchases recovered strongly in April, however, following the reopening of non-essential retail stores (12 April) and ended the month 6% above pre-COVID levels. Aggregate credit and debit purchases also recovered last month but remain marginally below pre-COVID levels due to the on-going weakness in “social” spending.
A recovery in consumer credit is one of three key signals to watch in the 2021 messages from the money sector. March 2021 data provided only tentative encouragement in terms of the direction of travel, but April’s trends in so-called “faster indicators” may be the start of more substantive support…
Bashing the plastic
In my previous post, “More bullish on UK consumption”, I highlighted potentially good news for UK suppliers of consumer durables. I quantified the level of excess money holdings that UK households have accumulated during the COVID-19 and the potential spending boost in 2H21 and 1H21. I argued that:
“it is reasonable to assume that a large proportion of this will be directed towards durable goods whose consumption was delayed during lockdown.”
The latest data on UK spending on credit and debit cards provides further support. The ONS provides this data based on daily Clearing House Automated Payment System (CHAPS) payments at around 100 major retail companies. Companies are allocated to one of four categories based on their primary business:
“Staples”: companies that sell essential goods such as food and utilities
“Work-related”: companies providing public transport or selling petrol
“Delayable”: companies selling goods whose purchased could be delayed such as clothing or furnishings
“Social”: spending on travel and eating out
Aggregate and delayable payments up to end-1Q21 (Source: ONS; CMMP)
At the end of 1Q21, credit and debit card purchases of so-called “delayable” goods were still 31% below the average levels recorded in February 2020 (“pre-COVID”). The chart above illustrates the backward looking, seven day rolling average of purchases. Lockdown restrictions had a clear, negative impact on delayable goods purchases in 2Q20 and 1Q21. Aggregate credit and debit card purchases were also 13% below pre-COVID levels at the end of 1Q21, supported only by spending on “staples”.
What a difference a month makes – payment trends during April 2021 (Source: ONS; CMMP)
These purchases recovered strongly in April, however, following the reopening of non-essential retail stores (12 April) and ended the month 6% above pre-COVID levels (see chart above). Aggregate credit and debit purchases also recovered last month but remain marginally below pre-COVID levels due to the on-going weakness in “social” spending (see chart below).
Too early yet for a strong recovery in social spending (Source: ONS; CMMP)
Conclusion
A recovery in consumer credit is one of three key signals to watch in the 2021 messages from the money sector. March 2021 data provided only tentative encouragement in terms of the direction of travel, but April’s trends in so-called “faster indicators” may be the start of more substantive support…
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
Estimated growth in excess UK money holdings in £mn (Source: CMMP)
The key message
UK households (HHs) were already “poised to disappoint” before COVID-19 hit as post-GFC consumption drivers proved unsustainable. During the pandemic, consumption fell much faster than incomes as savings increased markedly. HHs continued to accumulate money holdings at rates well in excess of the pre-COVID period in 1Q21 while YoY declines in consumer credit hit historic levels.
Monthly money flows followed the timing of lockdown restrictions and relaxations closely. This suggests a relatively large element of “forced” savings that could be released relatively quickly to support economic activity. That said, much of these accumulated savings have accrued to HHs that already have sizable savings, have higher incomes, and are older – such HHs typically spend less from any extra savings they accumulate.
Excess money holdings reached £139bn at the end of 1Q21 (CMMP estimates) and could total £164bn by the end of 1H21 (below the OBR’s forecast of £180bn). The latest Bank of England forecast suggests that 10% of these excess money holdings will be spent over the next three years, compared with 5% previously (and current OBR forecasts). This c£16bn spending boost is likely to be front loaded into 2H21 and 1H22.
It is reasonable to assume that a large proportion of this will be directed towards durable goods whose consumption was delayed during lockdown (eg, car sales). So-called “social consumption” will naturally benefit too, but there is only so much time that can be made up – you can only eat so many meals in one day!
Please note that the summary comments above and charts below are extracts from more detailed analysis that is available separately.
The key message in six charts
Post-GFC/Pre-Covid: HH consumption funded initially by slowing rate of savings
Trends in HH savings and savings ratio since 4Q07 (Source: ONS; CMMP)
During COVID: HH savings increased markedly
Impact of COVID pandemic on HH savings rate (Source: ONS; CMMP)
1Q21 – HHs accumulate money holdings at c.4x pre-COVID levels
Monthly flows of HH money holdings in £bn (Source: BoE; CMMP)
Challenges and opportunities for UK mortgage providers
The key chart
Trends in YoY growth rates in UK mortgages, consumer credit and corporate credit (Source: BoE; CMMP)
The key message
The relative stability in UK mortgage demand has been a consistent theme in the “message from the UK money sector” over the past five years. During the COVID-19 pandemic, this stability was the only bright spot in an otherwise gloomy UK retail finance market:
Monthly net borrowing hit £11.8b in March 2021, the strongest net borrowing since records began in 1993, driven by the expected ending of temporary stamp duty tax relief
Looking forward, approvals are below their November 2020 peak but remain relatively strong
Margin pressures are easing as the effective rate on new mortgages continues to rise, but remain a challenge for mortgage providers.
Against this cyclical backdrop, digital transformation remains the primary challenge and opportunity for the sector as providers seek to meet their customers’ needs more effectively while delivering operational efficiencies.
Experience across Europe shows how digitalisation can deliver tangible benefits including reduced costs, automated scoring/applications, enhanced market segmentation, and improved treasury and liquidity management.
Challenges and opportunities
The relative stability in UK mortgage demand has been a consistent theme in the “message from the UK money sector”. Over the past five years, the annual (nominal) growth in mortgages has averaged 3.3%. The lowest rate of growth (2.7%) was recorded in August 2020 and October 2020 and the maximum rate of growth (3.8%) in March 2021. The relative stability in mortgage demand contrasts sharply with the more volatile corporate (NFC) and consumer credit demand, especially during the COVID-19 pandemic (see key chart above).
Twenty-year trends in UK mortgage demand (Source: BoE; CMMP)
That said, current mortgage demand remains subdued in relation to historic trends. For reference, the average nominal and real rates of growth in the five years between March 2003 and March 2008 were 12.2% and 10.1% respectively, compared with 3.3% and 1.5% averages in the past five years (see chart above).
Monthly flows (£bn) in UK lending to individuals since January 2020 (Source: BoE; CMMP)
During the COVID-19 pandemic, this stability was the only bright spot in an otherwise gloomy UK retail finance market. The chart above illustrates monthly mortgage flows in blue, other consumer credit in maroon and credit cards in green. The weakest net borrowing occurred at the height of the pandemic in April 2020, but mortgage borrowing remained positive. In contrast, UK households have been repaying consumer credit in each of the past seven months.
The latest data for March 2021, for example, shows lending to individuals totalling £11.3bn. This includes £11.8bn mortgage borrowing and net repayments of both credit cards and other consumer credit of £-0.4bn and £-0.2bn respectively.
A new high in monthly net borrowing of £11.8bn (Source: BoE; CMMP)
Monthly net borrowing hit £11.8b in March 2021, the strongest net borrowing since records began in 1993. Net borrowing had averaged £6bn over the previous six months, with a gradually rising trend. The large jump in March reflects expectations that temporary stamp duty tax relief would be ended in March. This has now been extended to the end of June 2021. The previous peak in monthly net borrowing (£10.4bn) occurred in October 2006.
Trends in approvals for house purchase (Source: BoE; CMMP)
Approvals are below their November 2020 peak but remain relatively strong. The number of approvals for house purchases has fallen from 103,100 in November last year to 82,700 in March 2021. The latest approvals are 45% and 32% above the 56,945 and 62,663 approvals in March 2020 and March 2019 respectively.
Effective rates on new mortages and on the outstanding stock (Source: BoE; CMMP)
Margin pressures are easing as the effective rate on new mortgages continues to rise, but remain a challenge for mortgage providers. The effective rate of interest paid on the outstanding stock of mortgages has been stable during 1Q21 but at a new low of 2.08bp, down 4bp YTD. The effective rate on new mortgages has risen to 1.95% from the series low of 1.72% in August 2020. So while margin pressures remain, the spread between the effective rates has narrowed to 13bp.
What now for UK mortgage providers?
Against this cyclical backdrop, digital transformation remains the primary challenge for the sector as providers seek to meet their customers’ needs more effectively while delivering operational efficiencies.
Experience across Europe shows how digitilisation is already delivering tangible results across operations, sales and risk. Examples include: the automation of credit applications to deliver 70% FTE reductions; improved risk scoring for first time borrowers; micro-segmentation to support more targeted sales; and optimised treasury and liquidity management.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
Interpreting 1Q21 monetary trends in the UK and EA
The key chart
Trends in YoY growth rates for UK and EA broad money (Souce: BoE; ECB; CMMP)
The key message
Trends in monetary aggregates provide important insights into the interaction between the money sector and the wider economy. Headline growth figures can easily be misinterpreted, however, leading to false narratives regarding their implications for investment decisions and asset allocation.
To avoid this, CMPP analysis has identified three key signals that help to interpret current trends in the UK and euro area (EA) effectively: monthly household (HH) deposit flows (behaviour); the synchronisation of money and credit cycles (policy context); and consumer credit (growth outlook).
The UK and EA money sectors have provided consistent, if subdued, messages regarding HH behaviour, the policy context and the consumption/growth outlook during 1Q21:
HHs in the UK and EA continue to increase their money holdings at very elevated rates, despite earning negative returns. Such behaviour contributes to neither growth nor inflation – a challenge for inflation hawks
The unprecedented desynchronization of money and credit cycles continues to limit monetary policy effectiveness
HHs are still repaying consumer credit and YoY growth rates hit historic lows during 1Q21
Investment narratives, like endurance athletes, require consistent refuelling to maintain performance. The best returns from equities are typically when economies are still weak but the rate of growth is either inflecting upwards or looking less weak. If such trends are accompanied by rising bond yields then cyclical sectors/stocks will typically outperform defensive sector/stocks (Oppenheimer, 2020).
The key messages from the money sectors (summarised above) have provided only limited nourishment for those positioned for sustained inflation and/or cyclical recovery in the UK and EA to date.
March data provided tentative encouragement in terms of the direction of travel but more substantive support may be required in 2Q21 to sustain recent performance.
Rather than focusing on headline growth numbers in broad money, investors should look instead for a more noticeable moderation in HH deposit flows, a resynchronisation in money and credit cycles and a recovery in consumer credit over the coming months.
Making sense of monetary aggregates
The CMMP approach
Trends in monetary aggregates provide important insights into the interaction between the money sector (central banks, FIs and NBFIs) and the wider economy. Headline YoY growth figures can easily be misinterpreted, however, leading to false narratives regarding their implications for investment decisions and asset allocation.
To avoid this, CMPP analysis has identified three key signals that help to interpret current trends in the UK and EA effectively: monthly HH deposit flows (behaviour); the synchronisation of money and credit cycles (policy context); and consumer credit (growth outlook).
A review of 1Q21
The UK and EA money sectors have provided consistent, if subdued, messages regarding household (HH) behaviour, policy effectiveness and the consumption/growth outlook during 1Q21.
Monthly HH deposit flows as a multiple of 2019 average monthly flows (Source: BoE; ECB; CMMP)
HHs in the UK and EA continue to increase their money holdings at elevated rates, despite earning negative returns. UK and EA monthly flows of HH deposits are still 3.5x and 1.9x the levels seen in the pre-COVID periods. These latest data points for March 2021 are below the respective peaks of 5.8x (May 2020) and 2.4x (March 2020) for the UK and EA respectively. Nonetheless, they show that HHs are still preferring to hold highly liquid assets (overnight deposits), despite earning negative real returns.
High levels of precautionary and forced savings indicate that HH uncertainty remains elevated and consumption delayed (see below). The challenge here for inflation hawks is that money sitting idly in overnight deposits contributes to neither GDP growth nor inflation.
Gap between lending growth and money growth in the UK and EA (Source: BoE; ECB; CMMP)
The unprecedented desynchronization of money and credit cycles continues to limit monetary policy effectiveness. The gap between YoY growth rates in private sector lending and money supply hit historic highs of 11.4ppt in the UK in February and 8.0ppt in the EA in January. This matters because the effectiveness of monetary policy relies, in part, on certain stable relationships between monetary aggregates.
The latest data for March 2021, indicates that the gaps have narrowed slightly to 10.8ppt in the UK and 6.5ppt in the EA. Again, inflation hawks will be disappointed, however, by the slowdown in the growth rates in private sector credit. In the UK, this fell from 3.9% YoY in February to only 1.5% YoY in March and in the EA, from 4.5% YoY in February to 3.6% in March.
Monthly flows in UK and EA consumer credit (Source: BoE; ECB; CMMP)
HHs are still repaying consumer credit and YoY growth rates hit historic lows during 1Q21. In the UK, HHs have repaid consumer credit for seven consecutive months. In the EA, they have repaid consumer credit in five of the past seven months.
YoY growth rates in UK and EA consumer credit (Source: BoE; ECB; CMMP)
In both regions, the YoY growth rate hit a historic low in February of -10.0% in the UK and -2.8% in the EA before. In March the rate of decline slowed to -8.6% and -1.7% in the UK and EA respectively.
Investment implications
Investment narratives, like endurance athletes, require consistent refuelling to maintain performance. The best returns from equities are typically when economies are still weak but the rate of growth is either inflecting upwards or looking less weak. If such trends are accompanied by rising bond yields then cyclical sectors/stocks will typically outperform defensive sector/stocks (Oppenheimer, 2020). The key messages from the money sectors (summarised above) have provided only limited nourishment for those positioned for sustained inflation and/or cyclical recovery in the UK and EA in 2021 to date.
What to watch for in 2Q21
March data provided tentative encouragement in terms of the direction of travel but more substantive support may be required in 2Q21 to sustain recent performance. Rather than focusing on headline growth numbers in broad money, investors should look instead for a more noticeable moderation in HH deposit flows, a resynchronisation in money and credit cycles and a recovery in consumer credit over the coming months.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
