“2Q20 message from the money sector – the UK”

The key chart

The key message

The 2Q20 message from the UK money sector is very similar to the corresponding euro area version.

Headline data points suggest little change to the existing narrative. Households (HHs) and corporates (NFCs) continue to increase their money holdings, with rolling 3m inflows for the past four months since March exceeding the total inflows recorded for the whole of 2019. High levels of uncertainty still prevail. Above trend NFC borrowing and a recovery in HH mortgage demand offset the weakest YoY trends in consumer credit (-3.6% YoY) since 1994.

Again, analysis of monthly flows presents a more nuanced picture. Flows into sterling money holdings peaked back in March 2020, but remain more than double 2019 average monthly flows. The message for UK consumption is “less negative” – HHs repaid only £86m compared with a record £7bn in April. For context, this compares with average new monthly consumer borrowing of over £1bn per month in 2019. NFCs remain active borrowers from banks and financial markets, with June’s £11bn of borrowing driven mainly by capital market issuance. Bank lending to NFCs saw divergent trends. Large corporates repaid record amounts, but SMEs borrowed an additional £10bn. The annual growth rate in SME lending hit an all-time high, reflecting the impact of government support schemes.

In short, uncertainty in the UK has also peaked but remains very elevated, still.

Six charts that matter

In-line with developments in the euro area (EA), the headlines from the Bank of England’s money supply data for June 2020 also suggest little change to the on-going “message from the money sector” narrative.

The UK’s headline money series (M4ex) grew 11.9% YoY compared with the monthly average of 2.9% in 2019. HH money holdings (64% total) increased 7.5%, NFC money holdings (23% total) increased by 23.2% (YoY), and the volatile but smaller non-intermediating financing company (NIOFC) holdings (15% of total) increased by 17.7%.

The key chart above places these trends into context. Money holdings increased by £82bn in total during 2019, at an average of just under £7bn per month. The rolling 3m sums of money holdings for the past four months – March ($86bn), April (£113bn), May (£159bn) and June (£109bn) – all exceed the 2019 annual increase. This is what uncertainty looks like!

Looking at the counterparts to money holdings, again the story is similar to the EA version but with more exaggerated trends. NFC lending grew 9.2% YoY, down from 11.2% in May, but above trend. Mortgage demand grew 3.0% YoY, resilient but slightly below the 2019 average growth of 3.3%. However, HH consumer credit fell by -3.6% YoY, the weakest growth rate recorded since this series began in 1994. No real surprises here (at least in terms of trends).

Continuing the parallels with the EA message, the monthly flow data presents a more nuanced picture than the headline data suggests. Monthly flows into sterling money holdings peaked at £67bn in March, almost 10x the 2019 monthly average flow. They fell back to £16bn in June, but this is still 2.3x the 2019 average monthly flow. The more volatile NIOFC flows peaked in March, but HH and NFC monthly flows did not peak until May (both at £26bn before falling to £12bn and £8bn in June respectively). Note that these large inflows are occurring despite negative real returns. The effective interest rates on new HH time (0.73%) and sight (0.26%) hit new lows having fallen 31bp and 20bp since February 2020 respectively. The effective interest rates on NFC time (0.17%) and sight (0.13%) also fell 10bp in June 2020.  

After 2 months of large repayments (£7bn April, £3bn May), HH borrowing increased by almost £2bn in June. As can be seen from the chart above, the recovery in mortgage borrowing was the driver here. Looking ahead, mortgage approvals for house purchase also increased to 40,000 in June, up from the record low of 9,300 in May. However, June’s approvals were still well below February’s pre-Covid level of 73,700.  

HHs repaid only £86m of consumer credit in June compared with £4bn, £7bn and £5bn monthly repayments in March, April and May respectively. Positive, or less negative, news for the UK economy, but note that this small repayment contrasts with an average of £1.1bn in new consumer borrowing per month in the 18 months to February 2020 (Bank of England, June 2020).

NFC lending saw divergent large NFC and SME trends. Large NFCs repaid a record £16.7bn in June, following a £13bn repayment in May. Approximately half of these repayments came from public administration and defence. The YoY growth rate for large NFC lending fell to 4.8% (dotted red line above) from 15.5% YoY in April. In “Credit where credit’s due“, I highlighted the important increase in SME borrowing in May (£18bn). In June, SMEs borrowed an additional £10bn well above the previous largest monthly SME borrowing of £0.6bn in September 2016. The YoY growth rate in SME lending hit a new high of 17.7% reflecting, in part, loans arranged through the government support schemes (eg, Bounce Back Loan Scheme).

NFCs borrowed almost £11bn from banks and financial markets in June. This was below the £32bn and £16bn borrowed in March and April respectively, but similar to May’s borrowing level. June’s borrowing was driven by capital market issuance – £7bn in bond issuance and almost £4bn raised in equity.

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