It would appear that one of the main features of the credit crunch era which has been turbo-charged in 2019 so far has escaped the chatting and think tank classes. This is the situation where the UK can borrow on extraordinarily cheap terms. As I type this the two-year and five-year Gilt yields are of the order of 0.46% and the benchmark ten-year is at 0.67%. The only other time we have ever seen yields down here is when Governor Mark Carney was cracking the whip over the Bank of England in late summer and autumn 2016 demanding that they buy Gilts at nearly any price. That kamikaze phase even pushed us briefly to negative yields as the market let him buy at eye watering prices.
This was on my mind as I read this from the Institute for Government which has written what it calls an explainer on whether the UK can do this.
During the election campaign, Johnson said that it “is certainly true is at the moment (that) there is cash available. There’s headroom of about £22bn to £25bn at the moment.”
The whole concept is predicated on a complete fantasy.
This figure for headroom refers to the gap between the latest official forecast for borrowing in 2020/21 and the maximum amount that is consistent with meeting Philip Hammond’s fiscal mandate – that borrowing should be no more than 2% of GDP in 2020/21, after adjusting for the ups and downs of the economic cycle (which is typically referred to as “cyclically-adjusted” or “structural” borrowing).
Firstly no sniggering at the back please when you read “the latest official forecast for borrowing in 2020/21” as we recall that the first rule of OBR Club is that the OBR is always wrong! Next comes the “fiscal mandate” which in the ordinary course of events would have a half-life that would not reach 2021 which is of course even more likely now that the man called Spreadsheet Phil has fallen on his sword.
Oh and that is before we get to “structural” borrowing which means pretty much whatever you want it too. But finally we get a grain of truth.
Mr Hammond has bequeathed his successor a level of borrowing that is low by historical standards. The Office for Budget Responsibility’s March forecast suggested borrowing would be 0.9% of GDP (or £21bn) next year, virtually all of which would be structural.
The reliance on the number-crunching of the serially unreliable OBR is odd but there is a kernel of truth in there which is that we are currently not borrowing much. Last year it was 1.1% of GDP and the debt to GDP ratio has been falling as the economy has grown faster than the debt.
This brings me back to the piece de resistance which is that we can borrow incredibly cheaply and if we look at in terms of the infrastructure life cycle the thirty-year Gilt yield is a mere 1.33%. So we could if we chose borrow quite a large sum on very cheap terms. As to how much well into the tens of billions and maybe a hundred billion. Just in case readers think I am breaking my political neutrality I have made similar points to my friend Ann Pettifor who is an adviser to the Labour Party with the only difference being that markets would trust a Corbyn led government less. How much less is hard to say as we know that any yield ( the Greek ten-year is around 2%) tends to get hoovered up these days.
If we move to the other side of the coin which is how such funds would be spent the picture then sees some dark clouds. They are called Hinkley C, HS2 and the Smart Meter debacle although I think the latter was foisted onto out electricity bills.
Oh and before I move on real yields are much more complicated than often presented. After all none of us know what UK inflation will be over the next 30 years, but it seems more than likely that the yields above will not only be negative but significantly so.
We can continue our number crunching with this from the Bank of England this morning.
The annual growth rate of consumer credit continued to slow in June, falling to 5.5%. Annual growth has fallen steadily since its peak in late 2016, and particularly over the past year reflecting a fall in the average monthly net flow of consumer credit. Since July last year, the net flow has averaged £1.0 billion per month, compared with £1.5 billion per month in the year to June 2018.
Let me translate this a little. The annual rate of growth has fallen since they pumped it up with their “Sledgehammer QE” of August 2016. This was a change in claimed strategy as of course Governor Carney has regularly told us that “This is not a debt fueled recovery” ( BBC August 2015). Of course according to Governor Carney the August 2016 move saved around 250,000 jobs although even his biggest fans have to admit he has had a lot of problems in the area of unemployment forecasting.
Whilst 5.5% is slower than compares not only to an extraordinary surge but is for example nearly double wage growth, quadruple likely GDP growth and around five times real wage growth. Also the actual amount at £218.1 billion has grown considerably.
There seems to be a serious media effort going on to support the UK housing market. Here is @fastFT from earlier.
Rise in mortgage borrowing points to stabilisation in UK house market.
Does it? Here is the actual Bank of England data.
Net mortgage borrowing by households was £3.7 billion, close to the average of the previous three years. This followed a slightly weaker net flow of £2.9 billion in May. The annual growth rate of mortgage lending remained stable at 3.1%, around the level that it has been at since 2016.
The trouble for House price bulls is that those are the sort of levels which saw house price growth across the UK grind to a near halt. A similar situation exists for what seems to be coming down the chain.
Mortgage approvals for house purchase (an indicator of future lending) increased by around 800 in June to 66,400 and the number of approvals for remortgaging rose slightly to 47,000. Notwithstanding these small rises, mortgage approvals remained within the narrow ranges seen over the past three years.
I have looked at things in a different light today showing how numbers are twisted, manipulated and if that does not do the trick get simply ignored like the level of bond yields. Some of this sadly starts at the official level where we get what are in practice meaningless concepts like structural borrowing or this from Bank of England Governor Mark Carney in August 2015 via the BBC.
“The timing of a rise in interest rates is drawing nearer,” Bank of England governor Mark Carney says at the start of the Inflation Report press conference. He also says speculation about when interest rates begin to rise is a good thing and a sign of growing economic confidence.
Let me finish by referring to a campaign I have been running for seven years or so now which is over the impact of the Funding for Lending Scheme. Remember all the promises about small business lending?
and the growth of SME borrowing rose to 0.8%, its highest since August 2017.
Also as we note lending to SMEs at £167.8 billion has fallen far below unsecured credit is it rude to wonder how much of the £67.6 billion lent to the real estate sector ended up in the buy-to let bubble?