There is a lot to consider already today as I note that my subject of Monday Bitcoin is in the news as it has passed US $10,000 overnight. The Bank of England must be relieved that something at least is rising faster than unsecured credit in the UK! Sir John Cunliffe has already been on the case.
@BankofEngland Sir JohnCunliffe says cryptocurrencies not a threat to financial stability – but says it is not an official currency and urges investors to be cautious @BBCr4today ( h/t Dominic O’Connell )
It is probably a bit late for caution for many Bitcoin investors to say the least. However if we return to home territory we see an area where the Bank of England itself was not cautious. This was when it opened the UK monetary taps in August 2016 with its Bank Rate cut to 0.25%, £60 billion of extra Quantitative Easing and the £91.4 billion and rising of the Term Funding Scheme. This has continued the house price boom and inflated consumer credit such that the annual rate of growth has run at about 10% per annum since then.
The credit problem
As well as the banking stress tests yesterday the Financial Stability Report was published and it spread a message of calm and not a little complacency.
The overall stock of outstanding private non-financial sector debt in the real economy has fallen since prior to the crisis,though it remains high by historical standards, at 150% of GDP.
There are two immediate problems here. The credit crunch was driven by debt problems so using it as a benchmark is plainly flawed. Secondly many of those making this assessment are responsible for pushing UK credit growth higher with their monetary policy decisions so there is a clear moral hazard. In addition students will be wondering why what are likely to appear large debt burdens to them are ignored for these purposes?
Excluding student debt, the aggregate household
debt to income ratio is 18 percentage points below its 2008
This is particularly material as we know that student debt has been growing quickly in the UK due to factors such as the rises in tuition fees. From HM Parliament in June.
Currently more than £13 billion is loaned to students each year. This is expected to grow rapidly over the next few years and the Government expects the value of outstanding loans to reach over £100 billion (2014 15 prices) in 2018 and continue to increase in real terms to around £330 billion (2014 15 prices) by the middle of this century.
Pretty much anything would be under control if you exclude things which are rising fast! On that logic thinks are okay especially if use inflation to help you out.
Credit growth is, in aggregate, only a little above nominal GDP growth. In the year to 2017 Q2, outstanding borrowing by households and non-financial businesses increased by 5.1%; in that same period, nominal GDP increased by 3.7%.
They have used inflation ( currently of course above target ) to make the numbers seem nearer than they are. This used to be the common way for looking at such matters but that was a world where wage growth was invariably positive not as it is now. If we switch to real GDP growth which was 1.7% back then or wages growth which this year has been mostly a bit over 2% in nominal terms things do not look so rosy.
If we apply the logic applied by the Bank of England above then this below is a sign of what Elvis Presley called “we’re caught in a trap”
The cost of servicing debt for households and businesses is
currently low. The aggregate household
debt-servicing ratio — defined as interest payments plus regular mortgage principal repayments as a share of household disposable income — is 7.7%, below its average since 1987 of 9%.
So not much below but something is a lot below. There are many ways of comparing interest-rates between 1987 and now but the ten-year Gilt yield was just under 10% as opposed to the 1.25% of now. So we cannot afford much higher yields or interest-rates can we?
The position here is so bad that the Bank of England feels the need to cover itself.
consumer credit has been growing rapidly,
creating a pocket of risk
Still pockets are usually quite small aren’t they? Although the pocket is expanding quite quickly.
The outstanding stock of consumer
credit increased by 9.9% in the year to September 2017
What are the numbers for economic growth and wages growth again? There is quite a gap here but apparently in modern language this is no biggie.
Rapid growth of consumer credit is not, in itself, a material risk to economic growth through its effect on household spending. The flow of new consumer borrowing is equivalent to only 1.4% of consumer spending, and has made almost no contribution to the growth in aggregate consumer spending in the past year.
This is odd on so many levels. For a start on the face of it there is quite a critique here of the “muscular” monetary policy easing of Andy Haldane. Also if the impact was so small the extra 250,000 jobs claimed by Governor Carney seems incredibly inflated. In this parallel world there seems almost no point to it.
Yet if we move into the real world and look at the boom in car finance which supported the car market there must have been quite a strong effect. Of course that has shown signs of waning. Also if you look at what has been going on in the car loans market and the apparent rise of the equivalent of what were called “liar loans” for the mortgage market pre credit crunch then the complacency meter goes almost off the scale with this.
Low arrears rates may
reflect underlying improvement in credit quality
I know many of you like the data set so here it is and please note the in and then out nature of student debt.
The total stock of UK household debt in 2017 Q2 was
£1.6 trillion, comprising mortgage debt (£1.3 trillion),
consumer credit (£0.2 trillion) and student loans (£0.1 trillion).
It is equal to 134% of household incomes (Chart A.9), high by historical standards but below its 2008 peak of 147%.(1)
Excluding student debt, the aggregate household debt to
income ratio is 18 percentage points below its 2008 peak
Most things look contained if you compare them to their peak! Also if we switch to mortgages we get quite a few pages on how macroprudential regulation has been applied then we get told this.
The proportion of households with high mortgage
DTI multiples has increased somewhat recently, although it
remains below peaks observed over the past decade ( DTI = Debt To Income)
The issue here can be summarised by looking at two things. This is the official view expressed only yesterday.
Lenders responding to the Credit Conditions Survey reported that the availability of unsecured credit fell in both 2017 Q2 and Q3, and they expect a further reduction in Q4.
Here is this morning’s data.
The annual growth rate of consumer credit was broadly unchanged at 9.6% in October
As you can see the availability of credit has been so restricted the annual rate of growth remains near to 10%. The three monthly growth rate accelerated to an annualised 9.6% and the total is now £205.3 billion.
The situation becomes even more like some form of Orwellian scenario when we recall the credit easing ( Funding for Lending Scheme) was supposed to boost lending to smaller businesses. So how is that going?
in October, whilst loans to small and
medium-sized enterprises were -£0.4 billion
There is of course always another perspective and Reuters offer it.
Growth in lending to British consumers cooled again in October to an 18-month low, according to data that may ease concerns among Bank of England officials concerned about the buildup of household debt………The growth rate in unsecured consumer lending slowed to 9.6 percent in the year to October from September’s 9.8 percent, the slowest increase since April 2016.