My report card for the Bank of England in the Covid-19 crisis

The advent of the Corona Virus pandemic has seen the Bank of England expand its activity beyond what we already considered to be extraordinary levels. There has been very little criticism I think for two reasons. Many of the new moves are not understood especially by the mainstream media and also they like to copy and paste official communiques of which there have been plenty! So let us work our way through the new policies to see the state of play.

Financing the UK government’s borrowing

Last week we looked at two factors here. The first is the QE ( Quantitative Easing) purchases which are presently running at a weekly rate of £13.5 billion and have so far totalled £35 billion in this phase. This meant that last week the UK did this.

 if we allow for the Bank of England purchases we remain net buyers of the order of £1.3 billion.

So issued debt in gross terms but via the Bank of England bought more. That looks to be a similar situation for this week as it buys the same amount and the UK Debt Management Office plans to issue some £10 billion of UK Gilts in nominal terms. The amount raised will be more than that ( the surge in the Gilt market means the majority of Gilts trade over 100) but as you can see we look to be heading for a similar result.

So we can switch now to the result. On a basic level we see that the UK government can finance itself and at quite a rate as we are issuing debt at a rate of £12 billion or so a week. This is quite a rate! Also we are able to do so very cheaply as the fifty-year yield is 0.48% and the benchmark ten-year is 0.31% as I type this.

On a more minor level let me add in the Ways and Means account which some got so excited about at the end of last week. This is because it is likely to be smaller than the amounts above. I have just asked them for this week’s update.

Corporate Bonds

This is a much more awkward area for the Bank of England. That may be why in spite of Corporate Bond purchases being ongoing its data only goes up to April 1st! Actually the use of April Fools Day is appropriate in some ways and let me explain why. Regular readers will recall that last time the Bank of England struggled to find corporate bonds to buy and ended up buying the Danish shipping company Maersk. No doubt it and the Danish government were grateful.

Well on today’s list are that well know UK technology company Apple as well as IBM. Whilst you could make a case for buying BMW via the Mini operations here will the Bank of England be racing the ECB to buy its bonds? Anyway the operation will provide us with plenty of amusement over time if history is any guide.

Covid Corporate Financing Facility

Let me open with the scale of the operation so far.

Total amount of CP purchased since 02 April
£3.626bn (data as at close 8 April 2020).

It seems worthy enough but as we look at the details I start to get troubled.

The facility is designed to support liquidity among larger firms, helping them to bridge coronavirus disruption to their cash flows through the purchase of short-term debt in the form of commercial paper.

Term Funding Scheme

This has a new incarnation as after all we must keep supporting The Precious.

Following today’s special meeting of the MPC the Initial Borrowing Allowance for the TFSME will be increased from 5% to 10% of participants’ stock of real economy lending, based on the Base Stock of Applicable Loans.

I wonder how they would define fake economy lending? We may yet find out. Anyway as is typical the help for smaller businesses is not yet in play so this is something of a fail and may yet be a grand fail as there are signs that more than a few businesses have folded already.

One thing that finally swung my partners into throwing up their hands and decide retiring was preferable was the hoops we’d have had to jump through to raise money at short notice. ( @MattBrookes3)

There are other reports of problems in funding getting to smaller businesses.

Gary Crosbie wants to keep his staff on, but like other small firms, his profitable business now faces running out of cash owing to the coronavirus shutdown.

Mr Crosbie runs Inter-Refurb, which refurbishes pubs, hotels and restaurants.

He says he can demonstrate three years of profits, with £50,000 cash in the bank.

Yet because his bank decided it didn’t wish to support the construction industry, he failed the test that required banks only to lend according to their pre-shutdown criteria. He was rejected for a government-backed loan last week. ( Andy Verity of the BBC)

There is quite a contrast here between smaller businesses who need money now but are not getting it and The Precious who still have some £107 billion from the previous Term Funding Scheme in their coffers.

Mortgages

There are mortgage holidays in play so let us look as those as after all it is the area about which the Bank of England is most concerned if its track record is any guide.

Lenders have provided over 1.2 million mortgage payment holidays to households whose finances have been impacted by Covid-19, UK Finance has revealed today.

On 17 March, just under a month ago, mortgage lenders announced they would support customers facing financial difficulties due to the Covid-19 crisis. Three weeks later, by Wednesday 8 April, over 1.2 million mortgage borrowers had been offered a payment holiday by their lender.

The action taken by lenders means that one in nine mortgages in the UK are now subject to a payment holiday, helping households across the country through this difficult time. For the average mortgage holder, the payment holiday amounts to £260 per month of suspended interest payments, with many benefitting from the option of extending the scheme for up to three months. ( UK Finance)

However that starts to look like PR spinning when we note this.

And once credit card or mortgage payment holidays end (1 in 9 of us have the latter), we’ll have more debt to pay off – because what isn’t talked about enough is that interest charges will still being calculated – and then added to the amount owed. ( @GCGodfrey)

Here is a song for the banks from Hot Chocolate.

So you win again, you win again
Here I stand again, the loser.

US Dollar Liquidity Swaps

These are proving to be a success on two fronts. Firstly US Dollars are available and secondly the amounts required have been falling. At the peak some US $37.7 billion required but as of yesterday that had fallen to US $21.9 billion.

Comment

As you can see there are various layers here. If we start with what has become the modus operandi for QE which is facilitating and financing government spending then it is a success. The UK can borrow both in size and extremely cheaply right now. That is a good idea for the crisis but of course we know that such things have a habit of becoming permanent and then the issue changes.

Next we see that larger companies will be pleased with the Bank of England action including some foreign ones. This creates problems because whilst I do not want companies to fail because of cash flow issues created by the pandemic we arrive yet again at the Zombie businesses issue. One of the reasons we spent so much time in the credit crunch was that the march of the Zombies just carried on and on and on. In this category we can class the banks because in spite of the “resilient” rhetoric and all the support we see that we are invested in Royal Bank of Scotland at around a fiver compared to a share price of £1.10.

Smaller companies will be wondering when the help will start? Let me take you back to March 26th.

Hopefully my late father is no longer spinning quite so fast in his Memorial Vault ( these things have grand names).  That is assuming ashes can spin! We seem to be taking a familiar path where out of touch central bankers claim to be boosting business but we find that the cheap liquidity is indeed poured into the banks.

As to mortgage lending we see that the banks will be getting liquidity at 0.1%, but they are piling debt excuse me help on borrowers at a lot higher rate.

So it is a patchy report card where there are successes but they are not reaching the ordinary person or business. Reality contrasts starkly with the words of Governor Carney from the 11th of March.

I’ll just reiterate that, by providing much more flexibility, an ability to-, the banking system has been put in
a position today where they could make loans to the hardest hit businesses, in fact the entire corporate
sector, not just the hardest hit businesses and Small and Medium Sized enterprises, thirteen times of
what they lent last year in good times.

 

 

A blog from my late father about the banks

The opening today is brought to you by my late father. You see he was a plastering sub-contractor who was a mild man but could be brought to ire by the subject of how he had been treated by the banks. He used to regale me with stories about how to keep the relationships going he would be forced to take loans he didn’t really want in the good times and then would find they would not only refuse loans in the bad but ask for one’s already given back. He only survived the 1980-82 recession because of an overdraft for company cars he was able to use for other purposes which they tried but were unable to end. So my eyes lit up on reading this from the BBC.

Banks have been criticised by firms and MPs for insisting on personal guarantees to issue government-backed emergency loans to business owners.

The requirement loads most of the risk that the loan goes bad on the business owner, rather than the banks.

It means that the banks can go after the personal property of the owner of a firm if their business goes under and they cannot afford to pay off the debt.

Whilst borrowers should have responsibility for the loans these particular ones are backed by the government.

According to UK Finance, formerly the British Bankers Association, the scheme should offer loans of up to £5m, where the government promises to cover 80% of losses if the money is not repaid. But, it notes: “Lenders may require security for the facility.”

In recent times there has been a requirement for banks to “Know Your Customer” or KYC for short. If they have done so then they would be able to sift something of the wheat from the chaff so to speak and would know which businesses are likely to continue and sadly which are not. With 80% of losses indemnified by the taxpayer they should be able to lend quickly, cheaply and with little or no security.

For those saying they need to be secure, well yes but in other areas they seem to fall over their own feet.

ABN AMRO Bank N.V. said Thursday that it will incur a significant “incidental” loss on one of its U.S. clients amid the new coronavirus scenario.

The bank said it is booking a $250 million pretax loss, which would translate into a net loss of around $200 million.

Well we now know why ABN Amro is leaving the gold business although we do not know how much of this was in the gold market. Oh and the excuse is a bit weak for a clearer of positions.

ABN AMRO blamed the loss on “unprecedented volumes and volatility in the financial markets following the outbreak of the novel coronavirus.”

Returning to the issue of lending of to smaller businesses here were the words of Mark Carney back as recently as the 11th of this month when he was still Bank of England Governor.

I’ll just reiterate that, by providing much more flexibility, an ability to-, the banking system has been put in
a position today where they could make loans to the hardest hit businesses, in fact the entire corporate
sector, not just the hardest hit businesses and Small and Medium Sized enterprises, thirteen times of
what they lent last year in good times.

That boasting was repeated by the present Governor Andrew Bailey. Indeed he went further on the subject of small business lending.

there’s a very clear message to the banks-, and, by the way, which I think has been reflected in things that a number of the banks have already said.

Apparently not clear enough. But there was more as back then he was still head of the FCA.

One of the FCA’s core principles for business is treating customers fairly. The system is now, as we’ve said many times this morning, in a much more resilient state. We expect them to treat customers fairly. That’s what must happen. They know that. They’re in a position to do it. There should be no excuses now, and both we, the Bank of England, and the FCA, will be watching this very
carefully.

Well I have consistently warned you about the use of the word “resilient”. What it seems to mean in practice is that they need forever more subsidies and help.

On top of that, we’re giving them four-year certainty on a considerable amount of funding at the cost of
bank rate. On top of that, they have liquidity buffers themselves, but, also, liquidity from the Bank of
England. So, they are in that position to support the economy. ( Governor Carney )

Since then they can fund even more cheaply as the Bank Rate is now 0.1%.

Meanwhile I have been contacted by Digibits an excavator company via social media.

Funding For Lending Scheme was crazy. We looked at this to finance a new CNC machine tool in 2013. There were all sorts of complicated (and illogical) strings attached and, at the end of the day, the APR was punitive.

I asked what rate the APR was ( for those unaware it is the annual interest-rate)?

can’t find record of that, but it was 6% flat in Oct 2013. Plus you had to ‘guarantee’ job creation – a typical top-down metric that makes no sense in SME world. IIRC 20% grant contribution per job up to maximum of £15k – but if this didn’t work out you’d risk paying that back.

As you can see that was very different to the treatment of the banks and the company was worried about the Red Tape.

The grant element (which theoretically softened the blow of the high rate) was geared toward creating jobs, but that is a very difficult agreement (with teeth) to hold over the head of an SME and that contribution could have been clawed back.

Quantitative Easing

There is a lot going on here so let me start with the tactical issues. Firstly the Bank of England has cut back on its daily QE buying from the £10.2 billion peak seen on both Friday and Monday. It is now doing three maturity tranches ( short-dated, mediums and longs) in a day and each are for £1 billion.

Yet some still want more as I see Faisal Islam of the BBC reporting.

Ex top Treasury official @rjdhughes

floated idea in this v interesting report of central bank – (ie Bank of England) temporarily funding Government by buying bonds directly, using massive increase in Government overdraft at BoE – “ways & means account”

Some of you may fear the worst from the use of “top” and all of you should fear the word “temporarily” as it means any time from now to infinity these days.

This could be justified on separate grounds of market functioning/ liquidity of key markets, in this case, for gilts/ Government bonds. There have been signs of a lack of demand at recent auctions…

Faisal seems unaware that the lack of demand is caused by the very thing his top official is calling for which is central bank buying! Even worse he seems to be using the Japanese model where the bond market has been freezing up for some time.

“more formal monetary support of the fiscal response will be required..prudent course of action is yield curve control, where Bank can create fiscal space for Chancellor although if tested this regime may mutate into monetary financing”

Those who have followed my updates on the Bank of Japan will be aware of this.

Comment

Hopefully my late father is no longer spinning quite so fast in his Memorial Vault ( these things have grand names).  That is assuming ashes can spin! We seem to be taking a familiar path where out of touch central bankers claim to be boosting business but we find that the cheap liquidity is indeed poured into the banks. But it seems to get lost as the promises of more business lending now morph into us seeing more and cheaper mortgage lending later. That boosts the banks and house prices in what so far has appeared to be a never ending cycle. Meanwhile the Funding for Lending Scheme started in the summer of 2012 so I think we should have seen the boost to lending to smaller businesses by now don’t you?

Meanwhile I see everywhere that not only is QE looking permanent my theme of “To Infinity! And Beyond” has been very prescient. No doubt we get more stories of “Top Men” ( or women) recommending ever more. Indeed it is not clear to me that a record in HM Treasury and the position below qualifies.

he joined the International Monetary Fund in 2008 where he headed the Fiscal Affairs Department’s Public Finance Division and worked on fiscal reform in a range of crisis-hit advanced, emerging, and developing countries.

 

 

Will the new Bank of England Governor cut interest-rates like in Yes Prime Minister?

Today has brought something I have long warned about into focus. This is the so-called improvement made by Bank of England Governor Mark Carney where it votes on a Wednesday evening but does not announce the results until midday on a Thursday. With it being a leaky vessel there was an enhanced risk of an early wire for some.

The City watchdog is to investigate a jump in the pound which took place shortly before the Bank of England’s interest rate announcement on Thursday.

The rise has raised questions over whether the decision to hold the Bank’s base rate at 0.75% had been leaked.

The Financial Conduct Authority (FCA) said: “We are aware of the incident and are looking into it.”

In December, the Bank referred to the FCA a leak of an audio feed of sensitive information to traders.

The value of sterling increased about 15 seconds before midday on Thursday, when the Bank’s Monetary Policy Committee (MPC) made its announcement.

It rose from $1.3023 to $1.3089 against the dollar, and saw a similar increase against the euro.

( BBC )

Actually the Pound had been rallying from much earlier in the morning but perhaps the FCA was not up then. As to the enquiry we know from the TV series Yes Minister how they work.

That’s what leak enquiries are for.
Setting up.
They don’t actually conduct them.

In fact it gets better.

Members may be appointed, but they’ll never meet, and certainly never report.
How many leak enquiries can you recall that named the culprit? – In round figures.
– If you want it in round figures none.

For those of you who have never watched this series it described the UK system of government with both uncanny accuracy and humour. This week alone we saw the Chancellor call for expenditure cuts of 5% exactly as predicted. They will be promised and claimed but somehow wont actually happen if the series continues to be so prescient.

Press Conference

This was a classic Unreliable Boyfriend style performance proving that the Governor has not lost his touch. After hinting and not delivering an interest-rate cut he then in yet another innovation the Monetary Policy Report ( just like in Canada ) cut the expected economic growth rate.

Taken together, potential supply growth is projected to remain subdued, and weaker than expected a year ago.
The MPC judges that potential supply growth will remain subdued over the forecast period, at around 1% on average.
It initially falls a little from its current rate of around 1%, before rising to around 1½% in 2023 Q1.

The problem here was exposed by a good question from the economics editor of the Financial Times Chris Giles who asked why this had fallen so much in Governor Carney’s period of office? You always have an indicator of a hot potato when the question is quickly passed to a Deputy Governor. As ever the absent-minded professor Ben Broadbent waffled inconsequentially as he waited for the audience to lose the will to live. But there are clear underling issues here. The recent one is the fall in the speed limit form 1.5%  to 1% as implied here but as Chris highlighted it had already nearly halved. What Chris did not highlight but I will is the impact on this of the woeful “output gap” style thinking which I will illustrate by reminding you that the Governor originally highlighted an unemployment rate of 7% and now in the MPR we are told this.

The MPC judges that the long-term equilibrium unemployment rate has remained at around 4¼%

That is a Boeing 737 Max style error.

Today’s Data

It is hard not to recall Governor Carney tell us “this is not a debt-fuelled recovery” as you read the numbers below.

The extra amount borrowed by consumers in order to buy goods and services increased to £1.2 billion in December, in line with the £1.1 billion average seen since July 2018. Within this, net borrowing on credit cards recovered from a very weak November to £0.4 billion. Net borrowing for other loans and advances remained the same as in November, at £0.8 billion.

As you can see we are little the wiser as to why credit card spending fell in the way in did in the previous release ( November data). It may just be one of those things because the surrounding months were relatively strong a bit like we often see with the UK pharmaceutical sector which does not run in even months.

A consequence of this is below.

The annual growth rate of consumer credit rose to 6.1% in December, having ticked down to 5.9% in November. The growth rate for consumer credit has been close to this level since May 2019. Prior to this it had fallen steadily from an average of 10.3% in 2017.

So after rocketing it is merely rising very strongly! From. of course, a higher base. Can anybody think of anything else in the UK economy rising at this sort of rate? It is six times the rate at which the Bank of England now thinks the economy can grow at and around double wages growth.

Actually household consumption full stop picked up.

Net mortgage borrowing by households was £4.6 billion in December, above the £4.2 billion average seen over the past six months. Despite these stronger flows, the annual growth rate for mortgage borrowing remained at 3.4%. Mortgage approvals for house purchase (an indicator for future lending) also picked up in December, to 67,200, above the 65,900 average of the past six months. Approvals for remortgage rose slightly on the month to 49,700.

For newer readers this continues a trend started by the Funding for Lending Scheme which began in the summer of 2012. It took a year to turn net mortgage lending positive but over time this example of credit easing has had the effect you see above. Of course in true Yes Minister style it was badged as a policy to boost small business lending, how is that going?

Within this, the growth rate of borrowing from large businesses and SMEs fell to 4.4% and 0.8% respectively.

Actually and you have to dig into the detail to find this for some reason, smaller business borrowed an extra 0 in December which followed an extra 0 in November.

Comment

The last 24 hours have been an example of the UK deep-state in action. For example the ground was set for the new Bank of England Governor Andrew Bailey to reward the government with an interest-rate cut in return for his appointment just like in Yes Prime Minister. Meanwhile as head of the FCA he can make sure that the leak enquiry into the current Governor does not impact in his own term in a sort of insider regulation response to possible insider trading.

Meanwhile the new Governor has already lived down to his reputation for competence.

The Financial Conduct Authority (FCA) said most High Street banks had set “very similar prices”, after it demanded changes to the system.

Several big brands including Santander, Lloyds Banking Group and HSBC are set to bring in a 39.9% rate this year.

The FCA has sent a letter to banks, asking them to explain what influenced their decision.

The City regulator has also asked how the banks will deal with any customers who could be worse off following the changes.

Yep the reforms of the FCA have more than doubled overdraft rates for some. Today’s Bank of England release has picked up a bit of this as its quoted rate is now 20.69% adding to something that I have reported throughout the life of this blog. Official interest-rates may fall but some real world ones have risen.

So as we consider Bank of England Governors let me leave you with one of the finest from the Who.

I’ll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around
Pick up my guitar and play
Just like yesterday
Then I’ll get on my knees and pray
We don’t get fooled again
No, no!
We don’t get fooled again

 

 

 

Good news for the UK economy on the wages and broad money front less so on consumer credit

Today I feel sorry for whoever has to explain this at the Bank of England morning meeting.

“Annual house price growth remained below 1% for the 11th
month in a row in October, at 0.4%. Average prices rose by
around £800 over the last 12 months, a significant slowing
compared with recent years – for example, in the same
period to October 2016, prices increased by £9,100.”

That was from the Nationwide Building Society which has brought news to spoil a central banker’s breakfast. After all they have done their best.

“Moreover, mortgage rates remain close to all-time lows –
more than 95% of borrowers have opted for fixed rate deals
in recent quarters, around half of which have opted to fix for five years.”

The irony here is that they have made their own Bank Rate changes pretty impotent. I recall in the early days of this decade noting that nearly all mortgages in Portugal were fixed-rate ones and thinking we were different. Well not any more!

But unlike Governor Carney I consider this to be a good news story because of this bit.

the unemployment rate remains close to 40 year lows and real earnings growth (i.e. after taking account of inflation) is close to levels prevailing before the financial crisis.

So houses are becoming more affordable in general terms and the Nationwide is beginning to pick this up as its earnings to house price ratio has fallen from 5.2 to 5. Although the falls are concentrated in London ( from 10 to 8.9) and the outer London area ( 7.2 to 6.7). Both Northern Ireland ( now 4) and the West Midlands ( now 4.7) have seen small rises.

UK Wages

We can look at the wages position in more detail because this morning has brought the results of the annual ASHE survey.

Median weekly earnings for full-time employees reached £585 in April 2019, an increase of 2.9% since April 2018….In real terms (after adjusting for inflation), median full-time employee earnings increased by 0.9% in the year to April 2019.

So we see something of a turning in the situation for the better although sadly the situation for real wages is not that good, as it relies on the Imputed Rent driven CPIH measure of inflation. So maybe we had 0.5% growth in real wages.

Even using the fantasy driven inflation measure we are still worse off than we once were.

Median weekly earnings in real terms are still 2.9% lower (£18 lower) than the peak in 2008 of £603 in 2019 prices.

These numbers conceal wide regional variations as highlighted here.

In April 2019, the City of London had the highest gross weekly earnings for full-time employees (£1,052) and Newark and Sherwood had the lowest (£431).

Also the way to get a pay rise was to change jobs.

In 2019, the difference in growth in earnings for full-time employees who changed jobs since April 2018 (8.0%) compared with those who stayed in the same job (1.6%) was high, suggesting stronger upward pressure on wages compared with other years.

Tucked away in the detail was some good news for part-time workers.

Median weekly earnings for part-time jobs increased at a greater rate. In 2019, earnings increased by 5.2% in nominal terms, which translates to a 3.1% increase in real terms. The median weekly earnings for part-time employee jobs of £197 is 6.5% higher than in 2008 in real terms.

It seems that the changes in the national minimum wage have had a positive impact here.

Meanwhile far from everyone has seen a rise.

The proportion of employees experiencing a pay freeze or a decrease in earnings (in real terms) in 2019 (35.7%) is lower than in 2018 (43.3%) and in 2011 (relative to 2010) when it was 60.5%.

Mortgages

From the Bank of England today.

Mortgage market indicators point to continued stability in the market. Net mortgage borrowing by households was little changed at £3.8 billion in September. The stability in the monthly flows has left the annual growth rate unchanged at 3.2%. Growth rates have now remained close to this figure for the past three years. Mortgage approvals for house purchase (an indicator for future lending) were also broadly unchanged in September, at 66,000, and remained within the narrow range seen over the past three years.

As you can see this was a case of what Talking Heads would call.

Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was

Although there is a nuance in that the longer-term objective of the Bank of England is still in play. The true purpose of the Funding for Lending Scheme of the summer of 2012 was to get net mortgage credit consistently positive. That was achieved as there have been no monthly declines since ( unlike in 2010 and 2011) and over time the amount has risen. Nothing like the £9 billion pluses of 2007 but much higher than post credit crunch.

Consumer Credit

The credit impulse provided by the Funding for Lending Scheme was always likely to leak into here.

The annual growth rate of consumer credit was 6.0% in September. This growth rate has now been falling steadily for nearly three years. Revisions to the data this month, however, mean that the annual growth rate has been revised up slightly over the past two and a half years.

Let me give you an example of how the rate of consumer credit growth has been falling from last month’s update.

The annual growth rate of consumer credit continued to slow in August, falling to 5.4%.

The “revised up slightly” means it is now being reported as 6.1%. This is really poor as we can all make mistakes but this is a big deal and needs a full explanation as something has gone wrong enough on a scale to change the narrative.

Assuming this number is correct here is the detail for September itself.

The extra amount borrowed by consumers in order to buy goods and services fell slightly to £0.8 billion in September, and for the second month in a row was below £1.1 billion, the average since July 2018.

Broad Money

There was some good news in this release for the UK economy.

Total money holdings in September rose by £10.9 billion, broadly flat on the month, and remaining above the average of the past 6 months.

The amount of money held by households rose by £5.5 billion in September, primarily driven by increased holdings of interest bearing sight deposits. NIOFC’s money holdings rose by £4.3 billion, while the amount held by PNFCs rose by £1.0 billion.

I am a little unclear how a rise of just under £11 billion is “broadly flat”! But anyway this continues the improvement in the annual growth rate to 3.9% as opposed to the 1.8% of both January and May. Individual months can be erratic but we seem to have turned higher as a trend.

Comment

There have been several bits of good news for the UK economy today. The first is the confirmation of the improvement in the trajectory for real wages and some rather good growth for those working part-time. This feeds into the next bit which is the way that houses and flats are slowly becoming more affordable albeit that much of the progress has been in London and its environs. Looking ahead we see that the improvement in broad money growth is hopeful for the early part of 2021.

The higher trajectory for consumer credit growth is mixed,however. Whilst it will have provided a boost it is back to the age old UK economic problem of borrowing on credit and then wondering about the trade gap. It is especially poor that the Bank of England has been unable to count the numbers correctly. Also it is time for my regular reminder that the credit easing policies were supposed to boost lending to smaller businesses. How is that going?

while the growth rate of borrowing by SMEs rose slightly to 1.0%.

Woeful and a clear misrepresentation of what they were really up to.

NB

I later discovered that the Bank of England revised Consumer Credit higher by some £6.1 billion in August meaning that as of the end of September it was £225.1 billion.

 

 

 

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.

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 )