“Don’t be surprised – part 2”

The key chart

The key message

Two official UK data points released last week – the 1Q22 household (HHs) savings ratio and May 2022’s consumer credit growth – provide short-term comfort but may hide more serious medium-term concerns for the UK economic outlook.

The positive news: HHs have room to adjust to falling real incomes by running down savings and increasing borrowings further. The adjustment process here remains at an early stage (see “Don’t be surprised”).

The negative news: while the net lending position of the HH sector widened slightly in 1Q21 (0.9% GDP), the UK private sector, in aggregate, moved into a net borrowing position (-1.4% GDP). At the same time, the public sector increased its net borrowing position further (-6.7% GDP).

So what? The irony of post-Brexit Britain, is that the economy is currently more dependent than ever on the net lending of the RoW. The challenges of the pre-Covid period have returned already – twin domestic deficits counterbalanced by significant (and persistent?) current account deficits.

These trends are not unexpected but that does not mean that they are either welcome or sustainable.

Don’t be surprised – part 2

Two official UK data points released last week – the 1Q22 HHs savings ratio and May 2022’s consumer credit growth – provide short-term comfort but medium-term concerns for the UK economic outlook.

The context here is that real HH disposable income has fallen for four consecutive quarters (see chart above). Official forecasts suggest that this will continue for the rest of 2022 and in 2023.

In response, the same forecasts assume that HHs will reduce their savings ratio to a new low in 1Q23 by running down the excess savings built up during the pandemic (see chart below) and/or by increasing their borrowing. The positive news is that this process has hardly begun.

The 1Q22 HH savings ratio was 6.8%, unchanged from the 4Q21 and above the OBR’s forecast of 6.3% (see chart above). Of course, this represents a large decline from the 2Q20 peak of 23.9%, but the 1Q22 ratio is only slightly below the 20-year average of 7.1%. (Note that the OBR expects the savings ratio to fall further to 2.8% in 1Q23.)

Furthermore, while monthly HH money flows have moderated sharply, they remain slightly above pre-pandemic levels during 2Q22 (see chart above). The result? Rather than declining, the stock of excess savings is increasingly slightly still (see chart below). CMMP analysis estimated that excess savings currently total £167bn.

As an aside, the ONS also released the results of its modelling of the breakdown of the excess savings last week. The modelling suggests that so-called “forced savings” accounted for 75% of the increase in HH savings during the pandemic.

According to their calculation, this amounts to over £140bn, or around 10% of annual disposable income. This matters because forced savings are typically released relatively quickly to support economic activity (see “Forced versus precautionary”).

Consumer credit grew 5.7% YoY in May 2022, unchanged versus the previous month (see chart above). This is the fastest rate of growth since February 2020 (5.8%) due in part to base effects. The monthly flow of consumer credit in May 2022 fell, however, from £2.0bn in February, £1.3bn in March, and £1.4bn in April 2022 to £0.8bn. May’s monthly flow is also below the pre-pandemic average of £1.1bn.

In other words, the demand for consumer credit has recovered – a welcome trend – but is not increasing at a rate that would suggest significant levels of distressed borrowing. HH debt as a percentage of disposable income, while elevated in absolute terms, has remained relatively stable since 2015 and below the peaks seen in the built up to the GFC.

So far, so good. Recent trends reflect a return to normality and suggest that HHs still have room to adjust to falling real incomes. It is not all good news, however. In “Don’t be surprised”, I highlighted the negative implications of forecast trends for both financial equality and economic sustainability. Last week’s data also shines further light on question of economic sustainability.

The net lending of the UK HH sector, i.e. the surplus resources that the HH sector makes available to other sectors, rose from 0.6% GDP in 4Q21 to 0.9% GDP in 1Q22 (see chart above). However, the UK private sector in aggregate shifted from a net lending position of 4.3% GDP in 4Q21 to a net borrowing position of 1.4% of GDP.

When combined with the net borrowing of the UK public sector of 6.7% in 1Q22, the UK’s net borrowing position with the rest of the world increased to 8.4% GDP (see chart below).

The irony of post-Brexit Britain, is that the 1Q22 net borrowing position with the rest of the world exceeds the previous highest borrowing seen in 4Q201 (7.0% GDP).

With both domestic sectors currently running net borrowing positions, the UK is more dependent than ever on net lending from the RoW (see chart above).

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