The key chart
The key message
In this post, I consider last week’s coordinated policy responses from the UK government and the Bank of England in the context of UK financial sector balances and recent “messages from the money sector”.
Large and persistent sector imbalances, an over-reliance on the RoW as a net lender and a household sector that was already poised to disappoint were challenging the economy even before Covid-19 hit. The immediate “Covid-19” response from the private sector was to increase its net lending position to a record 22% of GDP, almost 3x the equivalent response after the GFC. The HH savings ratio increased to a record 29% and HH consumption fell by the largest amount ever recorded (£81bn). In direct response to this negative shock, the UK government increased its net borrowing position to negative 23% of GDP – a timely and appropriate response.
Since then, the message from the UK money sector has remained one of high uncertainty and slowing consumption even before the latest round of restrictions began. Hence, the latest coordinated responses are also timely, necessary and appropriate. Looking ahead, current trends also suggest that: (1) the UK government will maintain an increasingly interventionist role; (2) the Bank of England will remain committed to keeping nominal and real rates “lower for longer”; and (3) investors hoping for a shift away from long duration fixed income and equity trades may require considerable patience.
Seven charts that matter
On 5 November 2020, the UK government and the Bank of England coordinated a larger-than-expected fiscal and monetary response to the latest Covid-19 wave and the second national lockdown. Rishi Sunak, the Chancellor of the Exchequer announced the extension of the furlough scheme until March 2021 and the Bank of England increases its bond-buying programme by £150bn. In the latest CMMP analysis, I consider this joint policy response in the context of (1) UK financial sector balances and (2) recent messages from the money sector.
Large and persistent sector imbalances, an over-reliance on the RoW as a net lender (see graph above) and a household sector that was already poised to disappoint were challenging the economy even before Covid-19 hit. Up until the 4Q19, the UK private and public sectors were running net borrowing positions at the same time that were offset by the RoW’s persistent net lending. The HH sector was funding consumption by dramatically reducing its savings rate and accumulation of net financial assets. With real growth in disposable income slowing and the savings rare close to historic lows, the risks to the UK economy already lay to the downside and at odds with previous government forecasts.
The immediate “Covid-19” response from the private sector was to increase its net lending position to a record 23% of GDP in 2Q20. In other words, the amount of money that the private sector had “left over” after all its spending and investment in 2Q20 was approximately 3x the equivalent amounts after the GFC and the recession of the early 1990s (expressed as a % of GDP).
The HH sector was the main driver here. HH gross savings rose to £104bn in 2Q20 and the savings rate increased to a record 29% compared with 10% in 1Q20 and 7% a year earlier. HH consumption fell by the largest amount ever recorded (£81bn), driven by large declines in spending on hotels, restaurants, travel, recreation and cultural services. The HH net lending position accounted for 20ppt of the total 23% private sector net lending in 2Q20, another record.
In direct response to this negative shock, the UK government increased its net borrowing position to negative 23% of GDP – a timely and appropriate response. The main drivers here were the continuation of the Coronavirus Job Retention Scheme (CJRS), the introduction of the Coronavirus Self Employment Income Support Scheme (SEISS) and the Small Business Grant Fund.
Since then, the message from the UK money sector has remained one of high uncertainty and slowing consumption even before the latest round of restrictions began. The latest Bank of England data showed that HH deposits increased by £7bn in September 2020. While this flow was below the £14bn, £16bn and £27bn monthly flows seen at the peak of uncertainty in March, April and June respectively it was still 1.5x the average 2019 monthly flows. Co-incidentally, September’s YoY growth rate in consumer credit was the weakest since records began (-4.6% YoY).
2020 trends in HH consumer credit – flows and growth rates. (Source: Bank of England; CMMP analysis)
Conclusion
In summary, the latest coordinated fiscal and policy responses are timely, necessary and appropriate. Looking ahead, current trends also suggest that: (1) the UK government will maintain an increasingly interventionist role; (2) the Bank of England will remain committed to keeping nominal and real rates “lower for longer”; and (3) investors hoping for a shift away from long duration fixed income and equity trades may require considerable patience.
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.