Will car loans be the canary for UK unsecured credit?

Yesterday the news hounds clustered around one piece of economic news as they caught up at least tangentially with something we have been looking at for some time. From the Society of Motor Manufacturers and Traders.

UK new car market falls for sixth consecutive month in September – down -9.3% to 426,170 units. First time the important September market has fallen in six years.

This will have had an impact in various areas as for example if you happened to be an unreliable boyfriend style central banker looking for a reason to cancel a proposed Bank Rate rise for the third time you might think you have struck gold. However we were expecting trouble because as I pointed out on the 22nd of August there had to be a reason why manufacturers were offering what they call incentives but we call price cuts?

Ford is the latest car company to launch an incentive for UK consumers to trade in cars over seven years old, by offering £2,000 off some new models.

Unlike schemes by BMW and Mercedes, which are only for diesels, Ford will also accept petrol cars.

That issue has been added to by the uncertainty over what is going to happen to older diesels of the sort I have.

Confusion surrounding air quality plans has inevitably led to a drop in consumer and business demand for diesel vehicles, which is undermining the roll out of the latest low emissions models and thwarting the ambitions of both industry and government to meet challenging CO2 targets.

Back in the day I was told my Astra was efficient and low emission but let us move on whilst noting that official credibility in this area is very low. Registrations had been falling for 6 months compared to the year before so that we now find we have stepped back in time to 2014.

Year-to-date, new car registrations have fallen -3.9%. But, overall, the market remains at a historically high levels with over 2 million vehicles hitting UK roads so far this year.

What does this mean?

This is more of a consumption issue for the UK economy than a production or manufacturing one. You see in the year to August some 78.4% of UK car production was for export so whilst there is a downwards impact it is more minor than might otherwise be assumed. Ironically a fall in UK demand affects producers abroad much more as this from the European body indicates.

The other way round, the EU represents 81% of the UK’s motor vehicle import volume, worth €44.7 billion.

For example Germany exported 809,853 cars to the UK in 2015 according to its trade body. Actually it may not be the best of times to be a German car manufacturer. From Automotive News Europe.

FRANKFURT — New-car registrations in Germany fell 3.3 percent in September as continued uncertainty over the future of diesel-powered cars hit demand.

The issue is complex as much manufacturing these days is of parts rather than complete cars. For example the UK engine industry has had a good 2017 but it is more domestic based so it will need more months like August if it is to carry on in such a manner.

Engine production rises 11.9% in August with more than 150,000 made for export and home markets. Overseas demand drives growth in the month, up nearly 20% compared with last year.

So we advance on knowing that there will be an effect on consumption and a likely smaller one on manufacturing although the latter is more unpredictable. What we will see is a reduction in imports which will boost GDP in an almost faustian fashion as the other factors lower it.

Car loans

So far there is nothing to particularly worry a central banker as after all it is not as if manufacturing or consumption are as important as banking is to them. However there is a catch and maybe the car manufacturers have been brighter than you might otherwise think. From the 18th of August.

That is partly because car manufacturers and their finance houses are increasingly stimulating private demand by offering cheaper (and new) forms of car finance. As amounts of consumer credit increase, so do the risks to the finance providers. Most car finance is provided by non-banks, which are not subject to prudential regulation in the way that banks are. These developments make the industry increasingly vulnerable  to shocks.

Now if we return to the real world the concept of prudential regulation is of course very different as after all it was not that long ago that so many banks needed large bailouts. But have the car manufacturers been very cunning in making themselves look like “the precious” as in the banks?

So much of the car market has gone this way that you could question what registration actually means? It used to mean a car was bought but these days is vastly more likely to mean it has been leased.

The FLA is the leading trade association for the motor finance sector in the UK. In 2016, members provided £41 billion of new finance to help households and businesses purchase cars. Over 86% of all private new car registrations in the UK were financed by FLA members.

Today we were updated on how this is going?

New figures released today by the Finance & Leasing Association (FLA) show that new business volumes in the point of sale (POS) consumer new car finance market fell by 8% in August, compared with the same month in 2016, while the value of new business was up by 2% over the same period.

So in nominal terms they are doing okay so far but the real numbers are down. The response has been the normal “extend and pretend” of the finance industry where trouble is on the horizon.

finance providers have responded by lengthening loan terms and increasing balloon payments rather than upping monthly repayments.

So as the Bank of England Financial Policy Committee Minutes observed earlier this week if we look back there has been quite a party.

Growth in UK consumer credit had slowed a little in recent months but remained rapid at 9.8% in the year to July 2017. This reflected strong growth of dealership car finance, credit card debt and other borrowing, such as personal loans. Growth of consumer credit remained well above the rate of growth in household disposable income.

So that is now slowing and likely will be accompanied by falling used car prices as time progresses. Whether the price cuts for new models have been picked up by the inflation numbers I am not sure as I wonder if the scrappage schemes are treated separately but the truth is prices are lower. Ironically this could easily be the sort of deflation scenario that central bankers are so afraid of as we note the risk of both falling volumes and prices. That is bad for debt which of course the car companies are carrying plenty of.

Term Funding Scheme

The problem is that the bubble in car finance has been fed by the easy credit policies of the Bank of England. Last August it gave all this another push with its Bank Rate cut and extra QE. But personally I think the real push came from the Funding for Lending Scheme of the summer of 2013 which is now the larger Term Funding Scheme. It went into the mortgage market and some washed into the car market and here we are. Unless we were all going to have 2 cars each there had to be a limit.

Comment

So we see issues in the real economy of a nudge lower to consumption and a smaller impact on production with ironically a fall in imports. However as we see lower prices and lower volumes the real issue is how the credit market which has built up copes. We are of course told it is “resilient” and that the Bank of England is “vigilant” and the latter may for once be true as after all it hardly wants word to get around that it was there 3/4 years ago with some matches and a can of petrol! How about QE for car production? Oh and a government scrappage scheme for diesels as well…….

 

 

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What is the state of play in the UK economy?

Today has opened with some good news for the UK economy and it comes from the car production sector. From the Society of Motor Manufacturers and Traders.

British car manufacturing rose 7.8% in July, with 136,397 new units rolling off UK production lines, according to figures released today by SMMT. Major carmakers ramped up production for new and existing models in the month ahead of summer factory shutdowns, which provide an essential period for plant maintenance, upgrades and re-tooling.
Production for the UK bounced back in July, in readiness for the important September market, following seven successive months of decline, rising 17.7% – an increase of 4,490 units – while exports also grew by 5.3%. Cars made for overseas buyers represented nearly 80% of output in the month with 106,525 units shipped abroad, compared with 29,872 which stayed at home.

Once the better news washes through there are a few things to note. We mostly export the cars we make and mostly buy foreign ones ourselves. As it happened we built more cars for both in July. However it was not enough to offset earlier declines meaning overall production was down 1.6% for the seven months of 2017 in the numbers. The fall has essentially been for domestic sales which of course matches what we have seen there. Production for export is almost unchanged in 2017 so far ( -0.2%) which poses a question for the impact of the lower UK Pound £ and of course economics 101 which would predict more exports. It may be that these things ( J-Curve theory) take longer than often assumed.

The Confederation of British Industry or CBI was upbeat on the J-Curve impact on Tuesday however.

The survey of 432 manufacturers found that total order books and export order books were strong in August. The firming in export orders relative to the previous month reflected rising orders in 10 of the 17 manufacturing sub-sectors, led by mechanical engineering and aerospace….

22% of firms said their export order books were above normal, and 10% said they were below normal, giving a rounded balance of +11% – well above the long-run average of -19%.

We will have to see how all this plays out as we hope that the optimism will come to fruition.

Company problems

The ying to the hopeful yang above has come from some of the company reports this week. I looked at the woes of the subprime lender Provident Financial on Tuesday and the role of the easy money policies of the Bank of England in its rise. Yesterday saw this from WPP which is a large advertising company. From the BBC.

Shares in WPP fell almost 11% after the advertising giant reported slowing sales and warned about future growth.

The company said that group performance had been “much tougher” for the first seven months of its financial year.

It blamed growing economic uncertainty, reflecting a “rise of populism” in the UK and the US, and “bumpy” growth in Brazil, Russia and China.

As you can see from the quote its business is far wider than just the UK but as a general point it does not fit well with what has been reported for the world economy. Then this morning there was this. From Bloomberg.

LATEST: Dixons Carphone falls 20% in London after forecasting an unexpected drop in profit.

Firstly I responded like this.

Have you noticed how these drops in profit are so often “unexpected”! What do equity analysts actually do please?

If we return to the economy we see that we seem to be getting a flow of profit warnings as we try to figure out whether they represent what has already happened or are a leading indicator?

Gross Domestic Product

The headline numbers were unchanged at 0.3% for quarterly growth and 1.7% for annual growth. However tucked away were some interesting details. It was only a few days ago I pointed out that the public finances data hinted at some sort of fiscal stimulus and today we see this.

In the expenditure measure of GDP there was relatively strong growth in government spending and investment.

Also there was something that was not new but would cheer the cockles of Bank of England Governor Mark Carney.

UK GDP in current prices increased by 0.8% between Quarter 1 and Quarter 2 2017.

Nominal GDP growth in theory helps with debt burdens. I say in theory because in practice for the ordinary person there is also the issue of wage growth.

The contribution to nominal GDP growth from wage income (compensation of employees) slowed to 1.7 percentage points in Quarter 2 2017 compared with the same quarter a year ago; this is lower than the 2.1 percentage points recorded in each of the previous 3 quarters.

Also we continue our transformation to a services based economy.

contributing 0.4 percentage points to quarterly GDP growth in Quarter 2 (Apr to June) 2017 and 1.9 percentage points to the 1.7% growth seen over the past year.

What about the housing market?

This seems to be gently rumbling on according to the British Bankers Association data.

Housing market activity has been flat since the start of the year with lending and transactions both in line with 12 month averages.

But with an intriguing kicker.

First-time buyers and remortgage activity on the part of homeowners has supported lending for some time, but we anticipate the pace of growth to slow slightly.

Perhaps first-time buyers are feeling the passage of time or the Bank of Mum and Dad is at play or more simply this is just all the “Help To Buys” washing through the system. Meanwhile I am grateful to Henry Pryor for spotting this from Telegraph Property.

Steep increase in house prices slashed in London’s commuter belt

The surge in UK unsecured borrowing seems to have passed the high street banks by and I do hope it did not all go to Provident Financial.

Annual growth in credit card borrowing was 5.3%, while personal loans and overdrafts saw the recent contraction rate slow, from -1.3% to -0.9%*. Annual growth in overall consumer credit has increased from 1.9% to 2.0%.

Meanwhile I note that the UK BBA is now rebadged as part of UKFinance in a sort of leaky Windscale nuclear reprocessing plant to leak-free Sellafield sort of way.

Bank of England

This has given us the Funding for Lending Scheme and the Term Funding Scheme which it has told us will boost lending to business particularly smaller ones. Today’s numbers tell us this though.

Non-financial companies’ deposits are growing annually by 7.5%, as firms hold cashflow and reserves as a hedge against uncertainty in their trading conditions and as an alternative to making long-term funding commitments.

Is saving the new counterfactual of borrowing and lending?

Comment

The UK economy continues to bumble along with the occasional flicker of growth to be seen. If we move to the monetary situation then the stimulus level has risen as the UK Pound £ has fallen against what has been a powerful performance from the Euro in particular and 1.08 will not be welcomed by holidaymakers, especially as of course it is often expensive to change your money up. If we use the old Bank of England rule of thumb we see that the fall in the effective exchange rate since the EU Leave vote has been equivalent to a 3.3% reduction in the official Bank Rate. It makes the 0.25% reduction of the Bank of England look like a pea shooter to a bazooka doesn’t it? It also points out how bad an idea the cut was.

We are seeing what used to be called stagflation where we get a little growth with inflation. Of course the inflation is much lower than back then but you see so is pretty much everything else so it hits harder. Also the continuing rise in employment provides a boost as whilst wages per head are struggling and often failing to match inflation the aggregate number is rising. As Morpheus points out in The Matrix Reloaded.

There are some things in this world, captain Niobe, that will never change………….Some things do change.

Number Crunching

Thank you to Johannes Borgen for drawing my attention to this.

Bitcoin uses nearly 5% of total UK electricity consumption. This is ridiculous!

Just for clarity this is worldwide bitcoin use looked at in UK electricity terms.

Me on Core Finance

http://www.corelondon.tv/provident-financials-fall-grace-not-yes-man-economics/

 

 

 

The UK economy continues to motor ahead or if you prefer is on drugs

Today sees us advance on some key data for the UK economy as we receive production, manufacturing and trade data. But before we even get to it there has been a warning from France which has already opened the day with something of a conundrum.

In January 2017, output decreased sharply again in the manufacturing industry (−1.0% as in the previous month).

Whereas the Markit PMI ( Purchasing Managers Index ) told us this.

 The index was down from January’s reading of 53.6

We were told that the french economy was doing well in January. From Reuters.

“The expansion was broad-based with marked increases in output evident in both the manufacturing and service sectors, driven by firm underlying client demand. In turn, this filtered through into the labor market.”

Markit has had trouble before with France ironically for producing numbers which were lower than official estimates. But this is another issue for a series which has proved to be disappointing in its accuracy in more recent times.

UK monetary policy

This remains extremely expansionary with the Bank of England adding to its holdings of UK Gilts ( government bonds ) and corporate bonds this week. Indeed at £434.2 billion the UK Gilts part of the QE (Quantitative Easing) program has only one day left but at £8 billion so far there is more corporate bond QE to come. If we add in the £43.9 billion of the Term Funding Scheme we get an idea of the total scale of Bank of England monetary policy in balance sheet terms and that is before we note a Bank Rate set at 0.25%.

The other factor at play is the lower level of the UK Pound £ which post the EU leave vote in the UK has provided an economic stimulus equivalent to a 2.75% cut in Bank Rate if we use the old Bank of England rule of thumb. It would have created quite a shock would it not if we had somehow had the same exchange rate as before but with a Bank Rate of -2.5%!

Today’s data

Production and Manufacturing

Unlike the numbers for the French I quoted above these start brightly for the UK.

In the 3 months to January 2017, total production was estimated to have increased by 1.9%, with manufacturing providing the largest contribution increasing by 2.1%, its strongest growth since May 2010.

However manufacturing output continues to see-saw each month along with the pharmaceutical industry.

In January 2017, total production decreased by 0.4% compared with December 2016 with manufacturing providing the largest downward contribution, decreasing by 0.9%…………The monthly decrease in manufacturing was largely due to a decrease in pharmaceuticals, falling by 13.5%,………. pharmaceuticals can be highly erratic, with significant monthly changes, often due to the delivery of large contracts.

I am glad to see that our official statisticians have caught up with the view that I have been expressing on here for the best part of a year now as this recent pattern began last spring. However if we look back over the past year there is some call for a smile for spring.

Total production output for January 2017 compared with January 2016, increased by 3.2%, supported by growth in all 4 main sectors, with manufacturing providing the largest contribution, increasing by 2.7%.

The pharmaceutical sector is up some 6.1% on a year ago which is good news. But of course that only regains some of the ground which we lost.

Since then, both production and manufacturing output have steadily risen but remain well below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008 by 6.7% and 3.3% respectively in the 3 months to January 2017.

What about trade?

This is an ongoing worry for the UK economy that stretches back for around 30 years or so. Actually I recall days when these numbers were considered very important and as a young man working in the City it was “all hands on deck” when they were released. These days they do not get much of a mention especially if they are better because the financial twitter community if I may call it that do quite a bit of cherry picking. But the “same as it ever was” theme continued in January.

The trade deficit in goods and services in January 2017 was £2.0 billion, unchanged from December 2016.

It is odd that such an erratic number is the same for two months in a row but let us take a deeper perspective.

Between the 3 months to October 2016 and the 3 months to January 2017, the total trade deficit (goods and services) narrowed by £4.7 billion to £6.4 billion.

We find some cheer here in the improvement so let us probe further.

At the commodity level, the main contributors to the narrowing of the total trade deficit in the 3 months to January 2017, were increased exports of non-monetary gold, oil, machinery and transport equipment (mainly electrical machinery, aircraft and cars) and chemicals.

So the chemicals numbers are consistent with the reported growth of the pharmaceutical industry which is a relief as they do not always coincide. Also increased production and thence exports of vehicles has helped.

The latest data shows that passenger motor vehicles were the UK’s second highest exported commodity behind mechanical machinery in 2016. The value of cars exported by the UK increased by 14.8% in the year to January 2017 with export growth stronger to non-EU countries (17.9%) compared with the EU (10.0%).

Indeed if you want something hopeful take a look at this.

However one of the problems with these statistics is that they are unreliable and frequently heavily revised. For the UK this is a particular issue as the numbers for the service sector are collected quarterly at best. However this time the revisions were cheerful ones.

The trade in services balance (exports less imports) has been revised upwards by £2.7 billion in Quarter 4 2016, to a trade surplus of £26.6 billion. This reflects an upwards revision of £1.7 billion to exports, and a downwards revision of £1.0 billion to imports.

So a nudge higher for UK GDP (Gross Domestic Product) growth in the last quarter of 2017 although not enough to be especially material.

Another way of looking at this is to note how few countries we do so much of our trading with.

In 2016, nearly 50% of all UK exports of goods went to just 6 countries: the United States, Germany, France, Netherlands, Republic of Ireland and China. The United States are our biggest export partner, receiving 15.7% of all UK exported goods.

The UK’s largest import partner was Germany in 2016, supplying 14.8% of all goods imported to the UK. Similar to exports, over 50% of the UK’s imports of goods come from 6 countries: Germany, China, United States, Netherlands, France and Belgium.

Comment

This morning has seen some more relatively good news for the UK economy. The pattern for production and manufacturing has been relatively solid if erratic on a monthly basis and if we add in the noted improvement to services trade there is good news here. The worry ahead is of course the impact of inflation on the economy mostly via its impact on real wages. I note that according to the Bank of England’s latest survey the ordinary person is noticing it.

Asked to give the current rate of inflation, respondents gave a median answer of 2.7%, compared to 2.3% in November………. Median expectations of the rate of inflation over the coming year were 2.9%, compared with 2.8% in November.

They seem much more in touch with reality than the 2.4% for 2017 forecast by the Office for Budget Responsibility on Wednesday.

For those who follow the UK construction sector the numbers are below, but take them with not just a pinch of salt and maybe the whole salt-cellar.

Construction output fell by 0.4% in January 2017, following consecutive rises in November and December 2016 (0.8% and 1.8% respectively).