What happens if consumer spending is debt fuelled but slows anyway?

Today brings us to a sector of the UK economy that has been running rather red-hot which is the unsecured credit data. The BBC caught up with this on Monday albeit from data which is incomplete.

Debt on UK credit cards is growing at the fastest rate since before the financial crisis, figures show.

The more regular use of these cards for smaller, contactless purchases explains in part the greater debt being built up over short periods.

However, figures from UK Finance show that the annual growth rate in outstanding credit card debt of 8.3% in February was the highest for 12 years.

Some of you will already be smelling a rat as you recall that it has been over 10% in response to the Bank of England opening the credit taps with its “Sledgehammer” in August 2016. It is interesting to see though that on this series we are finally getting the same message. Oh and if you are wondering who UK Finance are they are the new name for the British Bankers Association in the same way that the leaky Windscale nuclear reprocessing plant became the leak-free Sellafield.

If we look further into the data there was potentially good news for the economy which does fit with news elsewhere.

“Bank lending to businesses saw modest year-on-year growth in February, driven by investment within the manufacturing sector”

Today’s Data

The data from the Bank of England could have been released with KC and the Sunshine Band in the background.

Now it’s the same old song
But with a different meaning
Since you been gone
It’s the same old song

Or to put it another way.

The annual growth rate for consumer credit ticked up slightly to 9.4% (Table J), although net lending remains broadly in line with its previous six-month average.

The monthly number rose from £1.3 billion in January to £1.6 billion in February and the total is now £209.6 billion. If we break that down the fastest growing component is credit cards which if we annualise the quarterly growth rate have risen by 11.3% and now 11.2% in 2018 so far meaning the total is now £70.6 billion. But for that we would be worried by the larger other loans and advances ( personal loans and overdrafts ) which total some £138.6 billion and on the same criteria have grown at 8.2% and 8.5%. Individual months can be erratic but this sector has been a case of the trend is your friend for a couple of years or so now.

Never believe anything until it is officially denied

One of my favourite phrases because it works so well. Brought to you this time by the Bank of England credit conditions survey and the emphasis is mine.

The availability of unsecured credit to households was reported to have decreased again in Q4, such that reductions were reported in all four quarters of 2017 (Chart 1). Lenders expected a significant decrease in Q1. Credit scoring criteria for granting total unsecured loan applications tightened again in Q4, and lenders expected them to tighten significantly further in Q1.

So they reduced it in the third quarter if you recall as well cut it back in the 4th and then gave it a “significant decrease” to er 9.4% in February. This is heading into comical Ali territory now.

Back in February 2017 Governor Mark Carney told us this at the Inflation Report press conference.

From an MPC perspective, just to put those numbers into
context, on the most expansive definition, the increase in
consumer borrowing would contribute up to a tenth of the
increase in consumption. So it’s something, but it’s not
everything. This is not a debt-fuelled consumer expansion
that we’re dealing with.

Of course he may still have been rattled by the opening question.

Governor, back in August the forecast for GDP for this year
was 0.8%. Now it’s being forecast at 2.0%. That’s a really
hefty adjustment. What went wrong with your initial
forecast?

This is not a debt-fuelled consumer expansion

I would like to stick with the statement by the Governor and bring in this from the Office of National Statistics earlier.

The accumulation of debt (measured by the amount of short-term and long-term loans households took out) in 2017 outstripped the amount of total financial assets they accumulated in the same period. This was the first time this happened since records began in 1987.

Also is anybody thinking of the Sledgehammer QE of August 2016 and of course the promises back then of further “muscular” action in November 2016?

Up until Quarter 3 2016, the households sector was a net lender. In the five quarters since, households have been net borrowers at an average of £3.3 billion per quarter. As a result, 2017 was the first year in which households were net borrowers – meaning that they had to borrow in order to fund their spending and investment activities.

Perhaps this is what the Governor meant at Mansion House last year.

This stimulus is working. Credit is widely available, the cost of borrowing is near record lows, the economy has outperformed expectations ( his especially).

Business Lending

This was supposed to be the main target of the Funding for Lending Scheme as it was fired up in the summer of 2012. The priority was smaller businesses so how is that going?

Net lending to SMEs has increased following a rather weak January

It rose by £700 million after falling by £700 million then. This means that the annual growth rate has risen from 0% to 0.1% and reminds us yet again of the true meaning of the word counterfactual.

Comment

So the beat goes on for UK unsecured credit although it seems to have taken UK Finance quite some time to catch up. The national accounts breakdown also tells us that there has been something of a shift although it includes secured debt and has issues with accuracy. On that subject if we stay with GDP here is an example of something from the research centre of the UK ONS.

Our initial results suggest that imputation of pension
accruals raises both the Gini coefficient and the geometric mean of equivalised household income materially, while the effects of imputing investment income are more marked on the Gini coefficient than on the geometric mean of household income.

So if we have imputed rent, pensions and investment income why not stop counting anything and simply input the lot and tell us that tractor production is rising. You may not be surprised to read that one of the authors is Martin Weale who is building a consistent track record.

Moving back to unsecured debt I note that the Bank of England ( of course Dr. Weale’s former employer )  is of course vigilant. But in spite of all this vigilance even growth at these levels does not seem to be helping the retail sector much as we observe a steady stream of receiverships and closures. On the more hopeful side falling inflation will help improve the real wages situation this year and mean that we may get some more of this.

UK gross domestic product (GDP) increased by 1.8% between 2016 and 2017, revised upwards by 0.1 percentage points from the second estimate of GDP published on 22 February 2018.

Happy Easter to you all.

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The stability of the UK economy is quite remarkable

Today gives us another opportunity to take a look under the engine cover of the UK economy and to do so considering the stated position of the Bank of England.

If the economy continues on the track that it’s been on… we can expect interest rates would increase somewhat.

Those were the words of Bank of England Governor Mark Carney on the BBC’s Today programme on Radio Four last week. Listeners will have been wondering if it will be third time lucky for his “Forward Guidance” as he has tried this tack before? More tucked away at the end of last week was a consequence of the actions of Governor Carney and his colleagues in August 2016 when they cut Bank Rate to 0.25% added a “Sledgehammer” to the QE ( Quantitative Easing ) programme and added a soupcon of credit easing with the Term Funding Scheme. Please remember the implications of giving banks cheap funding as you read this from the BBC about the interview with Governor Carney.

“What we’re worried about is a pocket of risk – a risk in consumer debt, credit card debt, debt for cars, personal loans,” he told BBC Radio 4’s Today Programme.
He said banks had “not been as disciplined as they should be” in their underwriting standards and pricing of this debt.

How is that going?

This is the data up to the end of August from the Bank of England.

The annual growth rate of consumer credit remained at 9.8%, with a flow of £1.6 billion in August.

As you can see this is a triumph for the “Sledgehammer QE” of Chief Economist Andy Haldane who wanted precisely this. Oh hang on sorry, it is now the result of unexpected behaviour by the banking system and is a worry for the Bank of England.

Also we see that monetary growth has picked up more generally.

Broad money increased by £16.6 billion in August (Table A), the highest flow since September 2016. Within this, flows for all sectors were positive (Tables B-D) with the largest contribution from non-intermediate other financial corporations (NIOFCs) (Table D).

The monthly numbers are very erratic but this was a surge but the overall picture remains one of strong unsecured credit growth and growth in the wider aggregates that may be picking up again. What is in doubt is the mix that this monetary growth will provide between economic growth and inflation but it suggests that if inflation is 3% economic growth will be 2%.

Remember when we were told that all of this was for smaller businesses or SMEs? Well lending to smaller businesses fell by £200 million in July and £100 million in August.

Business Surveys

Today saw the last of the PMI business surveys for the UK and it was a case of steady as she goes.

The headline seasonally adjusted IHS Markit/CIPS Services PMI® Business Activity Index posted 53.6 in September, up from an 11-month low of 53.2 in August. Looking at Q3 as a whole, growth has eased slightly since the previous quarter (the index averaged 54.3 in Q2, compared to 53.5 in Q3).

So the changes are much less that the likely error term. This was reflected in the overall picture described.

The three PMI surveys put the economy on course for another subdued 0.3% expansion in the third quarter, but the fourth quarter could see even slower growth.

Markit have a default setting of downbeat on the UK economy which is a switch of sorts as they used to treat France like that. But there is an interesting perspective in the detail of their report.

The rise in price pressures will pour further fuel on expectations that the Bank of England will soon follow-up on its increasingly hawkish rhetoric and hike interest rates. However, the decision is likely to be a difficult one, as the waning of the all-sector PMI in September pushes the surveys slightly further into territory that would normally be associated with the central bank loosening rather than tightening policy.

The inflation picture

We learnt more about this at midnight from the British Retail Consortium or BRC.

In September, Shop Prices reached the shallowest deflation level in the last four years of 0.1%, with prices falling just 0.1% compared to a 0.3% year-on-year decline in August. Non-Food price deflation accelerated to 1.5% in September, from 1.3% in August, although Non-Food prices are less deflationary than in September 2016, when they had fallen 2.1% year on year. Food prices increased in September to 2.2%, up from 1.3% in August.

So food prices are rising but other prices are falling as we seem set to shift from disinflation to inflation in the retail sector although the BRC gets itself into quite a mess on this subject.

Overall shop price deflation reached an all-time low in September with prices now teetering on the edge of inflation.

The food inflation is being driven by butter prices ( a worldwide issue presumably leading to happy days in New Zealand) and on a personal level I note that the rises in the price of broccoli we looked at a while back don’t seem to have reversed much if at all.

Government policy

We should find out more later about this. We are already expecting a boost to the Help To Buy scheme which has led to this.

3,858 first time buyers earning over £100k appear to have had Help2Buy…  ( @HenryPryor )

Also the mind boggles as to what the with a household income below £20,000 per annum were able to buy! Maybe it’s because I am a Londoner………

Also the new £10 billion will be an expansion on what has gone so far ( figures to June 2017).

The total value of these equity loans was £6.72 billion, with the value of the properties sold under the scheme totalling £32.37 billion.

Perhaps we will see more emphasis on social housing later as well.

Comment

Imagine you are an “unreliable boyfriend” what is the worst scenario? It is of course the sort of stability that the UK economy seems to be providing as it seems fairly likely that the first three-quarters will each provide GDP ( Gross Domestic Product) growth of 0.3%. Of course the unreliable boyfriend in question will be hoping we forget his Forward Guidance for what 2017 would be like and instead focusing on his heroic efforts which prevented that. The same heroic efforts he now hints he will reverse. As he spins like a top we are reminded that in monetary policy of a version of  the Bananarama critique.

It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
And that’s what gets results

Putting UK interest-rates back where they were clearly suggests that they should never have been cut in the first place. Even worse an unsecured credit boom has been fed. Oh and even the ratings agencies are raising the issue of credibility.

S&P troll BOE

S&P: WE BELIEVE RECENT STATEMENTS BY BOE AND CARNEY ARE PRIMARILY AIMED AT PROPPING UP GBP TO REDUCE IMPORTED INF PRESSURES ( @stewhampton )