What has happened to the UK consumer?

One of the apparent certainties of economic life is that the British consumer will take the advice of the Pools winner from many years ago and “Spend! Spend! Spend!”. This has led to another feature of our economic life because it seems to have been forgotten by many economists but before the credit crunch there were calculations that out marginal propensity to import from this was of the order of 40%. So there was a clear link to the trade deficit as well. Oh and for millennials reading this the Pools was gambling before there was a lottery, mostly in my experience by older people as for example my grandfather did but my father did not.

However last month provided a counterpoint to such certainty as the slowing in growth that we saw in the latter part of 2019 turned into something more.

In the three months to December 2019, the quantity bought in retail sales decreased by 1.0% when compared with the previous three months……..The quantity bought in December 2019 fell by 0.6% when compared with the previous month; the fifth consecutive month of no growth.

There was still some annual growth just not much of it ( 0.9%). This led to some sill headlines across the media as they used the British Retail Consortium claim that we had seen the worst year since 1995 for retail sales as click bait. That ignored the fact that its numbers are invariably much weaker than the official ones suggesting it id wedded to the bricks and mortar style retail sales which we know is troubled and not enough of the online world. Indeed there was far less reporting of this month’s effort from the BRC as the equivalent of tourists saw fewer easy pickings.

On a Total basis, sales increased by 0.4% in January, against an increase of 2.2% in January 2019. This is above both the 3-month and 12-month average declines of 0.4% and 0.2% respectively.

So weaker than last year but up and should it continue would end the decline in the averages. Actually we now know that the BRC was confused in this area as the inflation numbers did not pick this up.

We have to remember, this semi-positive performance will also be the result of aggressive discounts and consumers’ preoccupation with bagging a bargain.

Labour Market

This brings a contrasting theme as it should be supporting retail sales just as growth has faded away.

Between October to December 2018 and October to December 2019, the level of employment increased by 336,000 (or 1.0%) to a record high of 32.93 million.

There was also some real wage growth over the year just not as much as reported.

In the year to December 2019, nominal total pay (not adjusted for change in prices) grew by 2.9% to £544. Nominal regular pay grew by 3.2% to £512 over the same period. The recorded growth rates show that wage growth is decelerating.

Sadly many places fell for the real regular wages are back to the pre crisis peak spinning of our official statisticians as they cherry-picked from the very top of the tree. But even using more realistic inflation measures than the official imputed rent driven CPIH we still had some real wage growth.

Payment Protection Insurance

I have long argued this has been like a form of QE for the consumer and retail sales so this caught my eye earlier.

The bill for PPI claims in 2019 would be about £2.5bn, but Lloyds said no further provisions were needed as it had already set aside enough money.

It brings the total paid out by Lloyds over the mis-selling saga to £21.9bn. ( BBC )

Today’s Data

As suggested above we had a better month in January.

Retail volumes increased by 0.9% in January 2020, recovering from the falls in the previous two months; the increase was mainly because of moderate growth in both food stores (1.7%) and non-food stores (1.3%).

Actually if we look into the detail the underlying position is stronger and I am pleased to report that my main theme in this area was clearly in play.

Fuel saw a large fall of 5.7% in the quantity bought in January 2020 when compared with December 2019, which coincides with a rise in fuel prices of 2.3 pence per litre between December and January.

For newer readers I first wrote on the 29th of January 2015 that lower inflation boosted retail sales growth which you may note is not only true but the opposite of what central bankers keep telling us. I was involved in a debate with Danske Bank yesterday on this subject and in the end they agreed with me although that last sentence!

Higher than expected inflation makes people worse off, as it means people’s real wage growth is not as high as expected. That is why stable and predictable inflation is so important. Whether the target is 0%, 1% or 2% is less important.

Anyway returning to the data we see a corollary of my theme which is that higher prices should led to lower consumption which seems to be in play. It is probably also true that we are seeing the impact of the switch towards electric vehicles.

Perspective

The better number for January although it may not initially look like it helped the three month average.

In the three months to January 2020, both the amount spent and the quantity bought in the retail industry fell by 0.5% and 0.8% respectively when compared with the previous three months.

This is because November and December were so weak that even a better January was unlikely to fix it. The Underlying index was 108.5 in October then went 107.7 and 107.1 before now rising to 108.1. The index was set at 100 in 2016 so we see this area has seen more growth than others.

On an annual basis we have some growth just not very much of it.

When compared with a year earlier, both measures reported growth at 2.1% for the amount spent and 0.8% for the quantity bought.

Comment

Today gives an opportunity to look at how economics applies in real world events. Having just lost all readers from the Ivory Towers let me apologise to anyone who was disturbed by any screaming from them! They may have just have been able to laugh off the idea that higher inflation is bad but the next bit is too much. You see we have a favourable employment situation especially with real wage growth being added to employment growth but we are losing two factors.

The first is the impact of the PPI claim repayment money which looks as though much of it went straight to the retail sales bottom line. Next there is this from the Bank of England.

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.

Whilst it is still the fastest growing area of the economy I can think of my point is that growth has slowed and that seems to be affecting retail sales. A particular area must be what is going on with car sales and a few months back the Bank of England said that but since then it has decided that silence is golden on this subject. For fans of official denials there was of course this from Governor Carney back in the day.

This is not a debt fuelled expansion

 

Slow house price growth and a fall in credit card borrowing will worry the Bank of England

2020 has only just begun to borrow a phrase from The Carpenters but already the pace has picked up. Should the oil price remain above US $68 for a barrel of Brent Crude there will be consequences and impacts. But also we can look back on the Bank of England’s priority indicator in 2019 and on the subject here is the Nationwide.

Annual UK house price growth edged up as 2019 drew to a
close, with prices 1.4% higher than December 2018, the first
time it been above 1% for 12 months.

I have put in the format that would be most sensible for whoever is presenting the Bank of England Governor’s morning meeting. That is because pointing out the rise was only 0.1% in December does not seem as good and noting that unadjusted average prices fell by £452 may rewarded with an office that neither the wifi nor the cake trolley reach.

Continuing with that theme perhaps looking north of the border will help.

Scotland was the strongest performing home nation in
2019, with prices up 2.8% over the year.

Might be best to avoid this though.

London ended the year as the weakest performing region,
with an annual price decline of 1.8%.

If you are forced into looking at London then the Nationwide has done some PR spinning of the numbers.

While this marks the tenth quarter in row that prices have fallen in the capital, they are still only around 5% below the all-time highs recorded in Q1 2017 and c50% above their 2007 levels (UK prices are only around 17% higher than their 2007 peak).

Best to avoid the fact that London is usually a leader of the pack for the rest of the country.

Affordability

Should our poor graduate find themselves in this area then perhaps a new career might be advisable as even the Nationwide cannot avoid this.

“Even in the North and Scotland, where property appears
most affordable, it would still take someone earning the
average wage and saving 15% of their take home pay each
month more than five years to save a 20% deposit. In Wales
and Northern Ireland, it would take prospective buyers nearly seven years, and almost eight years for people living in the West Midlands.
“Reflecting the trend in overall house prices, the deposit
challenge is most daunting in the South of England, where it would take an average earner almost a decade to amass a 20% deposit. Again, the pressures are most acute in the
capital, where someone earning an average income would
need around 15 years to save a 20% deposit on the typical
London property (this is even longer than was the case
before the financial crisis, when it would have taken around
ten and a half years).”

So houses are very expensive and in many cases effectively unaffordable which contradicts the official measures of inflation which somehow ( somehow of course means deliberately) miss this out. So officially you are richer it is just unfortunate that you cannot afford housing….

Consumer Credit

Our unfortunate trainee cannot catch a break today as we note this.

The net flow of consumer credit was £0.6 billion in November, the smallest flow since November 2013.

Within it was something to send a chill down the spine of a modern central banker. The emphasis is mine and it will also have stood out in capitals to the Bank of England.

The extra amount borrowed by consumers in order to buy goods and services fell to £0.6 billion in November. This is the weakest since November 2013, and below the £1.1 billion average seen since July 2018. Within this, there was a net repayment of credit cards for the first time since July 2013, of £0.1 billion. Net borrowing for other loans and advances also weakened, to £0.7 billion.

Actually the stock of credit card borrowing fell by a larger amount from £72.4 billion to £72.1 billion. However whilst the drop stands out a little care is needed as the October flow was more than has become usual ( +£400 million) so the drop may be a bit of an aberration.

We learn more from the next bit.

These weak flows mean the annual growth rate of consumer credit fell to 5.7% in November, compared to 6.1% in October. It has now fallen 3.7 percentage points since July 2018, when it was 9.4%.

Whilst that may be true ( we recently had some large upwards revisions which reduced confidence in the accuracy of the data series) it dodges some important points. For example 5.7% is still much faster than anything else in the economy and because of the previous high rate of growth had to slow to some extent due to the size of the amount of consumer credit now ( £225.3 billion in case you were wondering). Also the other loans and advances section continues to grow at an annual rate of 6.6% which has not only been stable but seems to be resisting the impact of a weaker car market as car loans are a component of it.

Mortgage Lending

This morning’s release was a case of steady as she goes.

Lending in the mortgage market continued to be steady in November, and in line with levels seen over the past three years. Net mortgage borrowing fell marginally to £4.1 billion, and mortgage approvals for house purchase remained unchanged at 65,000.

The catch is that the push which began with the interest-rate cuts and QE bond buying after the credit crunch and was turbo-charged by the Funding for Lending Scheme in the summer of 2012 is losing its impact on house prices.

For those of you wondering what the typical mortgage rate now is another release today gave us a pointer.

Effective rates on new secured loans to individuals decreased 9bps to 1.87%.

For more general lending they seem a little reticent below so let me help out by saying it is 6.88%.

Effective rates on outstanding other unsecured loans to individuals decreased 4bps

That is another world from a Bank Rate of 0.75%. Meanwhile on that theme I would like to point out that the quoted interest-rate for credit cards is 20.3%. I have followed it throughout the credit crunch era and it is up by 2.5%. Yes I do mean up so relatively it has risen more as official interest-rates declined. This is something that has received a bit of an airing in the United States and some attention but not so here.

Comment

Let me open with two developments in the credit crunch era. The first is that even high interest-rates ( 20%) above do not seem to discourage credit card borrowing these days. I will also throw in that numbers from Sweden and Germany suggest that a combination of zero interest-rates for many and negative ones for some seem to encourage saving. That is a poke in not one but both eyes for the Ivory Towers.

Moving to our trainee at the Bank of England then I suggest as a short-term measure as the Governor is only around until March suggesting a man of international distinction is required to deal with issues like this.

Meteorologists say a climate system in the Indian Ocean, known as the dipole, is the main driver behind the extreme heat in Australia.

However, many parts of Australia have been in drought conditions, some for years, which has made it easier for the fires to spread and grow.

Returning to the economy then there was some better news from the broad money figures as November was a stronger month raising the annual rate of M4 growth to 4%. The catch is that it takes a while to impact and so is something for around the middle of 2021.

Me on The Investing Channel

 

 

The Money Supply trends suggest more weak economic growth for the Euro area and UK

As we move into July we have been provided with a reminder that the effects of the credit crunch are still with us. That is because the benchmark ten-year yield in France closed for the week in negative territory and is 0% as I type this. It is yet another sign of how weak the overall economic recovery has been as we wonder if we are facing another slow down. Such thoughts will have been reinforced by the manufacturing business surveys conducted by Markit as the PMI for Italy has fallen to 48.4 and Spain to 47.9. The latter is significant on three counts as this number had been showing positive growth before a sharp fall this time around. Also overall the Spanish economy has been the best performer of the larger Euro area economies for a while now.

The overall position was disappointing.

Eurozone manufacturing remained stuck firmly in a
steep downturn in June, continuing to contract at
one of the steepest rates seen for over six years. The disappointing survey rounds off a second
quarter in which the average PMI reading was the
lowest since the opening months of 2013,
consistent with the official measure of output falling
at a quarterly rate of approximately 0.7% and acting
as a major drag on GDP.

Money Supply

The downbeat mood created by the news above was not lifted by this from the European Central Bank or ECB.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 7.2% in May from 7.4% in April.

That means that we have been slip-sliding away from the peak of 7.5% in March. This matters because the narrow money supply has been an accurate signal of economic momentum in the Euro area. In economic theory terms it is a signal of what used to be called excess money balances. If we look for some perspective we see that the more hopeful trend that we had seen in 2019 is fading. As to the overall impulse this rate of growth compares to a peak of 11.7% back in July 2015 In response to the ECB having cut interest-rates into negative territory and pumping up the QE, as from January that year it had begun its first wide-scale program of 60 billion Euros a month.

Indeed of we look back we see some backing for the rumours that the ECB is planning to introduce a new round of QE. That is because we step back in time to January 2015 M1 growth was 6.9% which is not that different to the 7.2% and falling we are seeing now.

Broad Money

This has a different impact to the above which operates about 3 months or so ahead. Broad money growth takes around two years to fully impact which is why central banks target consumer inflation two years ahead. Here is the latest data.

Annual growth rate of broad monetary aggregate M3, stood at 4.8% in May 2019, after 4.7% in April 2019

The picture here is brighter as it has been pretty consistent growth since the nadir of 3.5% in August last year. The catch is that as it is split between growth and inflation we are never really sure what the mix between the two will be. Also if we look at the counterparts breakdown we see that the domestic parts are weak.

credit to the private sector contributed 2.8 percentage points (down from 3.0 percentage points in April),,,,,,,,,,, credit to general government contributed 0.2 percentage point (down from 0.5 percentage point)

In case you are wondering what made it grow it was rather off message as it may well have been the often maligned evil foreign speculators.

net external assets contributed 2.4 percentage points (up from 1.6 percentage points),

I jest slightly but you get the idea.

The UK

The troubling theme continued with the UK data which followed some 30 minutes later. The rate of M4 Lending growth went from 4.1% in April to 3.8% in May and as we do not get narrow money data in the UK it has been the best guide we get. In the detail there was maybe some hope as household money holdings rose.

The total amount of money held by UK households, private non-financial corporations (PNFCs) and non-intermediary other financial corporations (NIOFCs) (broad money or M4ex) increased by £2.9 billion in May (Chart 3). Within this, households’ money holdings increased by £6.5 billion, the largest increase since September 2016. The strength on the month was due to increased flows into non-interest-bearing deposit accounts.

If we switch to the credit side of the ledger then there has been something of a change.

The extra amount borrowed by consumers to buy goods and services was £0.8 billion in May, broadly in line with the £0.9 billion average since July 2018. Within this, additional borrowing for other loans and advances fell on the month to £0.5 billion, and credit card lending increased to £0.3 billion.

The annual growth rate of consumer credit slowed further in May, to 5.6%, reflecting the weaker lending flows seen over most of the past year. This was the lowest since April 2014, and well below the peak of 10.9% in November 2016.

If we just look at the pure data then whilst it is not put this way we seem to be seeing another sign of the slow down in the car market. I would expect that to be the main cause in the fall in other loans and advances and regular readers will recall that a couple of months or so ago the Bank of England explicitly mentioned this.

Moving to the trend it continues to slow albeit that at 5.6% the annual rate of growth is still far higher than anything else in the UK economy at more than triple the rate of economic growth and a bit less than double wage growth. Of course you can take an alternative view as the Bank of England called 8.3% growth slow and assured us only last week that debt has not been a driving force in the UK economic recovery. As she was a success a Glastonbury who better than Kylie to offer a critique of this?

I’m spinning around
Move outta my way
I know you’re feeling me
‘Cause you like it like this
I’m breaking it down
I’m not the same
I know you’re feeling me
‘Cause you like it like this

Comment

The monetary impulses in the Euro area and the UK are losing momentum which posts a cloud over economic prospects for the rest of 2019. The end of the world as we know it? No, but a weak growth impulse as we wonder if the opening quarter was as good as it gets for this year.

Meanwhile there was some brighter news from two bits of data from the Euro area earlier. From @LiveSquawk

Eurozone Unemployment Rate (May): 7.5% (est 7.6%, prev 7.6%) – Lowest Since July 2008……Italy Unemployment Rate (MayP): 9.9% (est 10.3%, prevR 10.1%)

The catch is that these are lagging indicators and represent more the growth of 2017 and the first part of last year.

Also let me give you some number crunching from the UK. Remember the Funding for Lending Scheme which started 7 years ago to boost business lending to smaller businesses. Well lending to what are called SMEs is now £166.3 billion whereas unsecured credit rushed past it to £217.3 billion. Or if you prefer monthly growth £0.2 billion for the former and £0.9 billion for the latter. So the reality is pretty much the opposite of the hype.

Podcast

Just a reminder that this is also on I-Tunes as Notayesmanspodcasts for those who listen to them via that source.

 

 

The UK borrows at up to 1.37% whilst charging students between 3.3% and 6.3%

The pace of economic news is on the march and for the UK much of it has been in one area this week. We can start with some news that will have Bank of England Governor Mark Carney asking for an extra shot in his morning espresso.

Prices fall 0.2% month-on-month, after
taking account of seasonal factors.

That is from the Nationwide Building Society although junior researchers at the Bank of England might prefer to emphasise at the morning meeting that the unadjusted number rose albeit by a mere £26. This meant this if we look for more perspective.

Annual house price growth remained below 1% for the sixth
month in a row in May, at 0.6%.

If we take that number then I welcome it because with annual wage growth of the order of 3% per annum we are finally seeing house prices become more affordable. In this sense real wages are improving as we remind ourselves one more time that official real wage measures exclude house prices. Can anybody think why?

As ever the average hides more than a few differences or if you prefer standard deviations. In the first quarter prices in London fell by 3.8% whilst everywhere from the Midland up saw increases of 2% or above. Why are London prices falling? Well nobody can afford them.

The main exception is in London, where a period of rapid
house price growth in the three years to 2015 means that
monthly mortgage payments would also be unaffordable for a large proportion of the local population.

I hear this regularly from my younger friends who find themselves scanning the shared appreciation offers as that is all they can afford in the Battersea area.

Looking Ahead

The Nationwide is downbeat on prospects.

Survey data suggests that new buyer enquiries and
consumer confidence have remained subdued in recent
months. Nevertheless, indicators of housing market activity, such as the number of property transactions and the number of mortgages approved for house purchase, have remained broadly stable.

However there are other factors at play. I have reported regularly on falling UK Gilt or bond yields and their likely influence on UK mortgage-rates especially fixed ones. This morning has reinforced that trend via lower inflation levels being reported in Saxony Germany and the impact of the new Trump tariff on Mexico. Accordingly the five-year Gilt yield has fallen to 0.64%. Now markets fluctuate but there has been a big move since the 0.95% of the fifth of this month.

Those numbers were too late for this morning’s Bank of England data which maybe showed a pick-up in April.

Net mortgage borrowing by households was strong for the second month in a row, relative to the recent past, in April at £4.3 billion. Over the previous six months it averaged £3.8 billion. The annual growth rate of mortgage lending remains unchanged at 3.3%, the level it has been at since August 2018.

The number of mortgage approvals for house purchase, a leading indicator of mortgage lending, ticked up in April to around 66,300. This was close to the average of the past two years and reversed the fall seen in March. The number of approvals for remortgaging was broadly unchanged, at around 49,400.

That might also have been people waiting on the Brexit which as it turned out was a mirage.

The yield curve

The UK yield curve reinforces my mortgage-rate point as we note that the two-year Gilt yield has dipped below 0.6%. Along the way that presents another problem for the Bank of England morning meeting as Governor Carney’s Forward Guidance is for higher and not lower yields starting with a Bank Rate at 0.75%.

There has been a lot in the press about the significance of shifting yield curve shapes and I would caution on this. Because we have seen so much central bank bond buying via QE they have plainly distorted bond markets. Indeed the “yield curve control” of the Bank of Japan explicitly sets out to do so. Thus old signals are now different.

Let me give you an example of an unintended consequence which raises a wry smile. Bond markets have rallied so much in May that the “yield curve control” is as I type this keeping the benchmark Japanese Government Bond yield up rather than down. Oh well!

But don’t ask me what I think of you
I might not give the answer that you want me to ( Fleetwood Mac)

Student Loans

This subject has received some airtime this week but much of the debate has missed the mark. Let me put it simply the UK can borrow at 1.37% for 50 years but we charge students an interest-rate based on the Retail Prices Index presently set at 3.3% and can be up to 3% higher depending on earnings. So up to 6.3%.

Does anybody think that is fair? How about we charge 1% over what it costs us to borrow? Also the hypocrisy of the UK establishment over RPI is unbounded here. I have pent the last 7 years arguing with an establishment desperate to scrap it bur suddenly when it gives a number they like they use it. That is cherry-picking the nicest cherry at the top of the tree.

Even worse as we stand this is pretty much Enron style accountancy as the majority of this will never be repaid.

Unsecured Credit

The Bank of England morning meeting will have found the numbers here problematic too.

The annual growth rate of consumer credit continued slowing, reaching 5.9% in April. It is now five percentage points below its peak in November 2016 and the lowest since June 2014.

The first problem is for my subject of yesterday Sir David ( Dave) Ramsden as a bit over a year ago he called an annual growth rate of 8.3% “weak” so I fear for how he will describe 5.9%. Also Governor Carney’s claim that this has not been a debt fuelled recovery faces an unsecured credit level of £217 billion.

There was no explicit mention of motor credit this month although there is an implied hint from the way the category it is in rose.

Within consumer credit, net borrowing for other loans and advances increased to £0.7 billion, whilst credit card lending fell slightly to £0.2 billion.

Comment

The month of May 2019 has seen quite a bond market rally and thus many borrowing costs will be falling or are about to. There is an irony on the government level where we borrowed large amounts when it was expensive and now borrow very little when it is cheap. Still as @fiscaccountant reminded us there is a passive gain if it persists.

Don’t forget that £99bn of that more expensive debt is being refinanced this year.

Just as some things look grim there is perhaps a little relief and it is reinforced by this from the Bank of England earlier.

The total amount of money held by UK households, private non-financial corporations (PNFCs) and non-intermediary other financial corporations (NIOFCs) (broad money or M4ex) increased by £9.1 billion in April , significantly above the recent average.

That is the written equivalent of quite a mouthful but it means UK money supply growth has picked up from the 1.8% of January to 2.8% in April. The way other things look we might need it.

Let me finish with something about the UK student loan system.

Insane in the membrane
Insane in the brain!
Insane in the membrane
Insane in the brain! ( Cypress Hill)

 

 

 

The plunge in UK car finance will make the Bank of England nervous

This week has brought another example of part of the famous Abraham Lincoln phrase when he pointed out that you can fool some of the people all of the time. This is the financial media and in this instance Reuters who on Monday told us this.

A six-month delay to Brexit gives Britain’s central bankers space to take a broader view of the economy this week, but persistent uncertainty over leaving the European Union makes them unlikely to raise interest rates any time soon.

There are various issues with this including the fact that in a month’s time it will be five years since Governor Carney gave us this Forward Guidance.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming
more balanced. It could happen sooner than markets currently expect.

In the coded language of central bankers that was seen as not only a green light but a double green. Yet he did nothing for two years before then cutting interest-rates in August 2016 and of course promising another cut in November of that year. Net he has managed a 0.25% rise to 0.75% in the six years of his tenure yet the financial media still write articles as if he is itching to raise interest-rates as he did not back in the days when Brexit seemed unlikely, to him anyway.

Last night was especially unkind to the Reuters views as the man who has tightened his grip on US monetary policy gave us his view.

Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go ….up like a rocket if we did some lowering of rates, like one point, and some quantitative easing.

So there you have it President Trump would like US interest-rates 1% lower ( as well as more QE to help finance his fiscal deficit) and the story of the last six months or so is that he has got what he wants. I doubt he will get it tonight at the Federal Reserve announcement but the sands feel like they are shifting.

As to the media predicting interest-rate increases I think they are singing along with Manfred Mann.

Well she was
Blinded by the light
Revved up like a deuce
Another runner in the night

House Prices

This is something else confirming my theme of today as we note this from the Nationwide.

UK house price growth remained subdued in April, with
prices just 0.9% higher than the same month last year….Prices rose 0.4% month-on-month, after
taking account of seasonal factors

So there is not much of a spring boost going on here. The Nationwide does a sterling job in spinning the line that houses are affordable to first-time buyers but even it has to admit this.

The exception is in London and parts of the south of
England where affordability pressures are more acute, and the monthly cost of servicing a mortgage, as well as raising a deposit, poses a greater challenge.

It is London that has pulled down the rate of house price growth and let me welcome the fact that whilst there are many different micro markets overall we now have real wage growth of around 2% per annum.

The Bank of England thinks differently and this is highlighted by the Nationwide chart which shows the average house price being around £160,000 in April 2013 as opposed to £214,920 now. That ladies and gentlemen has been the effect of its Funding for Lending Scheme which it argued reduced mortgage rates by around 2%. Of course we can never look at anything in outright isolation but it was a big player and the stopping of the rises will not be good news for any researcher there explaining this to Governor Carney.

Anyway it would appear that mortgage providers are ignoring the Forward Guidance rhetoric too. From MoneySavingExpert.com.

On top of that, there’s currently fierce mortgage competition, so the cheapest 5yr fixed-rate mortgage is 1.79%, which is seriously cheap, and 2yr fixes are as low as 1.39%.

As ever, the Nationwide numbers are flawed as they only cover its customer base but they do add to our total darabase.

Car Finance

This is an area which regularly concerns us and the quote below from the UK Financing & Leasing Association shows why.

In 2018, members provided £46 billion of new finance to help households and businesses purchase cars. Over 91% of all private new car registrations in the UK were financed by FLA members.

That amount continues to rise as I recall it being 86% not so long ago. So if you purchase your car outright you are now a rarity. Also this gives us a direct link between credit and what most regard as unsecured credit ( Governor Carney argues it is secured) and the real economy.

The Bank of England is usually reticent about its data on this subject ( I have asked….) but look at this from earlier.

The fall in net lending on the month was due to weaker net borrowing for other loans and advances, which fell from £0.8 billion in February to £0.2 billion. Within this, new borrowing for car finance fell sharply, alongside weaker car registration numbers in March 2019 than in previous years.

If we stay with unsecured finance the impact was as follows.

The extra amount borrowed by consumers to buy goods and services fell to £0.5 billion in March (Chart 1). This was the lowest monthly flow since November 2013 and well below the average of £0.9 billion since July 2018……The annual growth rate of consumer credit has continued to slow, reflecting the relatively weak flows of consumer credit over the past twelve-months. It fell to 6.4% in March, well below its peak of 10.9% in November 2016.

As you can see some context is needed as that overall rate of growth is still around double the rate of growth of wages and around quadruple economic growth. But as we have expected car finance has changed from being the engine for this to a brake on it.

Is anybody still expecting a Bank of England interest-rate increase?

Business Lending

This is rather eloquent as I remind you that the Funding for Lending Scheme was supposed to boost this.

Annual growth in lending to SME’s remains weak at -0.1%.

Six years of economic growth as well has made little or no difference as opposed to mortgage lending.

 The annual growth rate of mortgage lending was 3.3%. It has been around 3% since the beginning of 2016,

Actually the Bank of England thinks that the latter is “modest” so I dread what it really thinks of lending to smaller businesses.

Comment

Those believing the Forward Guidance mantra have three main problems from today’s data if we look at things from the Bank of England’s point of view. Firstly there are few wealth effects from house price inflation fading to less than 1%. Next there is the sharp slow down in car finance and what that implies. Thirdly there is this from the Markit Manufacturing PMI.

The headline seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index® (PMI®) fell to 53.1 in April, down from March’s 13-month high of 55.1. Alongside weaker growth in production, new orders and stocks of purchases, the lower PMI level also reflected job losses in the sector.

Actually this number worked beautifully with the estimate that stockpiling had raised the index by 2.0. But care is needed as the Bank of England does not think like that and is presumably now afraid of further falls. None of that suggests an interest-rate rise and nor does the rate of economic growth and of course inflation is below target.

Moving onto the money supply data it is hard to read on a couple of counts. Sadly the Bank of England in another mistake stopped publishing narrow money data some years back. All we have is broad money and that looks like it is improving a little. I say looks like because the Gilt Market has two big flows in March. The Operation Twist style QE I have been reporting on added £9 billion but a large Gilt matured ( £36 billion) and will have sucked much more out. Thus I think we should focus on M4 lending at 3.7% that the total M4 growth at 2.2% but we will only really know when we get the April and May data and the maturity gets replaced.

 

The UK see higher real and nominal GDP growth as house price growth slows

Today has already brought some good economic news for the UK so let us get straight to it. From the chief economist of the Nationwide Building Society.

“UK house price growth remained subdued in March, with
prices just 0.7% higher than the same month last year”

As you can see he is not keen, but I am pleased that if we look at the trend for wage growth we are now seeing annual wage growth of over 2% with respect to house prices. So there will be some welcome relief for those wishing to trade up and especially for first-time buyers. Of course it will take a long time to offset the long hard haul that led to this being reported by out official statisticians only yesterday.

On average, full-time workers could expect to pay an estimated 7.8 times their annual workplace-based earnings on purchasing a home in England and Wales in 2018. Housing affordability in England and Wales stayed at similar levels in 2018, following five years of decreasing affordability.

If you want the equivalent of earnings ratio porn then there was this from an area I will be cycling through later.

Kensington and Chelsea remained the least affordable local authority in 2018, with average house prices being 44.5 times workplace-based average annual earnings.

However returning to the Nationwide there are ch-ch-changes going on.

London was the weakest performing region in Q1, with
prices 3.8% lower than the same period of 2018 – the fastest
pace of decline since 2009 and the seventh consecutive
quarter in which prices have declined in the capital.

Indeed as there have been discussions about the Midlands in the comments section I took a look at the quarterly data which showed them growing at 2.6% in the West and 2.5% in the East. So as ever the picture is complex although even there we are seeing real wage gains albeit only small ones.

Also we need to remind ourselves that this covers Nationwide customers only although the numbers do fit the patterns we have been observing through other sources. Also whilst I welcome the change it seems clear that The Guardian does not.

Slide driven by London and south-east slowdown as Brexit chaos seems to put off buyers.

The economy

This mornings economic growth or Gross Domestic Product release brought some further good news. Not from the last quarter of 2018 which remained at 0.2% but from this.

There has been an upward revision of 0.1 percentage points to GDP growth in Quarter 3 (July to Sept) 2018 to 0.7%, due to revisions to estimates of government services;  In comparison with the same quarter a year ago, UK GDP increased by a revised 1.4%.

So we did a little better on 2018 and in particular had a really spectacular third quarter. It does look out of kilter with the rest of the year but let me point out that something which regularly gets the blame for once gets a little credit.

 where some of this activity is likely to have reflected one-off effects of the warm weather and the World Cup.

There are two catches in the series however. The first is the issue of investment which has been having a troubled period.

There have been some upward revisions to business investment in Quarter 3 and Quarter 4 2018 because of later survey returns, but business investment still fell in every quarter of 2018.

So not as bad as previously reported but even so there has been an issue here.

Business investment has now fallen for four consecutive quarters – the first such instance since 2009 –driven mainly by declines in transport equipment as well as IT equipment and other machinery. The latest estimates show that there have been some upward revisions in the second half of 2018, with business investment now estimated to have fallen by 0.9% in Quarter 4.

These revisions to the quarterly path have resulted in an upward revision to the annual figure with business investment falling 0.4% in 2018.

This is a bit of a ying and yang factor as the issue over future trade relationships and a possible Brexit are factors here. The optimistic view is that once there is more certainty it will not only pick up it will regain much of the lost ground. Maybe we will find out more later although of course today was supposed to be the day we got certainty!

Also there is this hardy perennial.

The UK current account deficit widened by £0.7 billion to £23.7 billion in Quarter 4 (Oct to Dec) 2018, or 4.4% of gross domestic product (GDP), the largest deficit recorded since Quarter 3 (July to Sept) 2016 in both value and percentage of GDP terms….Annually, the UK current account deficit widened to 3.9% of GDP in 2018, compared with 3.3% in 2017.

Regular readers will be aware I have major doubts about the accuracy of these numbers, specifically about the lack of detail we get about the important services sector. However the trend was worse last year probably driven by the weakening trade outlook generally. Here is how we paid for it.

The UK mainly financed its current account deficit through portfolio investment, where UK investors disinvested in foreign equity and debt securities, while overseas investors increased their holdings of UK debt securities.

Even more care is needed with those numbers as when you start looking into them they are built on what are often in my opinion dubious assumptions.

Unsecured Credit

With house price growth slowing Bank of England Governor Mark Carney will have a an even deeper frown today as he reads this.

The annual growth rate of consumer credit has continued to slow, though more gradually than during the second half of 2018. At 6.3% in February , it was well below its peak of 10.9% in November 2016. Within this, the growth rate of both credit card lending and other loans and advances fell slightly.

The rest of us will have another sigh of relief although there are two problems. The first is that an annual rate of growth of 6.3% is far higher than anything else in the economy. It is around double the rate of wage growth and more than quadruple the annual economic growth we have seen. The other is that the latest two monthly numbers at £1.2 and now £1.1 billion show signs of a rebound so it is a case of “watch this space” for subsequent months.

Money Supply

We saw some broad money growth in February.

The total amount of money held by UK households, private non-financial corporations (PNFCs) and non-intermediary other financial corporations (NIOFCs) (broad money or M4ex) increased by £3.6 billion in February.

The waters were muddied by a large Gilt maturity in February and the Operation Twist QE bond buying we have seen in March so far. Meaning we may see a pick up in the March data although it is unclear how much will be recorded as being the financial sector and hence ignored. The annual rate of growth at 2% in February is little to write home about but was a rise.

Comment

The UK data releases have been pretty solid today. Economic growth has been revised higher and there is a hint of better money supply growth. This comes with the usual caveats of high unsecured credit growth and a balance of payments deficit. Let me move onto the numbers which illustrate my point via something which gets widely ignored in the UK data which is inventories or stocks. I was struggling to get my head around this.

There was a £4.2 billion increase in inventories in Quarter 4 2018, including alignment adjustments and balancing adjustments. However, excluding these adjustments the estimates show a slight decrease of £1.2 billion in stocks being held by UK companies.

If you are going Eh? “You are not alone” as Olive sang but let me help out by pointing out there was a £3 billion balancing adjustment in the numbers which is quite a bit more than the economic growth reported so let us hope they were right.

Let me end on some better news as there was this also.

Nominal gross domestic product (GDP) grew by 0.7% in Quarter 4 (Oct to Dec) 2018, revised up from 0.6% in the first quarterly estimate.

 

 

 

 

 

The Bank of England reads the Guardian as it looks for economic clues

Yesterday brought something of a confession about the forecasting problems of the Bank of England.

As the American playwright Arthur Miller wrote, “A good newspaper, I suppose, is a nation talking to itself.” Using text analysis and machine learning, we decided to put this to test – to find out whether newspaper copy could tell us about the national economy, and in particular, whether it can help us predict GDP growth. ( Bank Underground).

As you can see there is a clearly implied view that they new help in predicting GDP growth. Curious though that they go to newspapers which are not only in decline in circulation terms but are under the “Fake News” cloud. Mind you they may well be more reliable than the Spotify playlists so beloved of Chief Economist Andy Haldane.

It is hard not to have a wry smile at the newspaper of choice here.

To find out, we used text from the daily newspaper The Guardian.

At this point the Financial Times otherwise known as the Bank of England’s house journal is likely to be somewhat miffed, although its brighter journalists will no doubt be aware of its own very poor forecasting record. Anyway Bank Underground found a nice reason to exclude it.

We chose this paper on account of it being free and easy to download;

Does the Bank of England have a poor internet connection? As to whether all of this works well they think it does.

First, their importance in forecasting current economic activity is comparable to a range of high-profile indicators, including the Index of Services, retail sales, equity prices and other confidence indicators, which are typically regarded as leading the economic cycle.

The catch is that they are comparing to this.

 the relevance of NI2 is over half the size of the IHS Markit/CIPS PMI indicator, which has come to be considered the single best survey_based predictor of current economic activity followed by many central banks and market participants.

For all their hype we know that the PMIs are not as reliable as we once thought or hoped as we mull whether the Bank of England has “amnesia” over the August 2016 PMI surveys which led to its Sledgehammer QE and Bank Rate cut as well as panicky promises of more of the same. Only for it to have a red face as it discovered it’s compass was upside down.

Upside down
Boy, you turn me
Inside out
And round and round
Upside down
Boy, you turn me
Inside out
And round and round ( Diana Ross)

Of course they could look at the money supply data which we are about to do. It has worked pretty well and it cannot be hard for them to do as they produce it themselves. It is really rather odd that they do not.

UK Money Supply

If we stay with forecasting as a theme it is really rather odd that the Bank of England abandoned the M0 money supply measure back in 2006. If it had kept it then its Chief Economist Andy Haldane may not have needed to be such a nosey parker about what everyone else is listening too on Spotify. Also for such a Europhile organisation it is rather extraordinary that today’s Money and Credit report does not include an M1 measure. After all that has proved to be an excellent economic leading indicator for the Euro area as we looked at only on Wednesday.

What we are left with is the broad money series or M4 which is very erratic on a monthly basis.

The total amount of money held by UK households, private non-financial corporations (PNFCs) and non-intermediary other financial corporations (NIOFCs) (broad money or M4ex) fell £3.6 billion in January.

Not good but that follows a £12,5 billion expansion in December which was out of line the other way. If we move to the rolling three-month average it at 2.4% is better than it was at the end of last year but continues to only suggest weak economic growth.

If we switch to lending that looks stronger and January was a good month for business lending.

The increase is bank lending to businesses was driven by lending to large businesses. This increased £4.3 billion in January, significantly above the recent levels, driven by M&A activity. Bank lending to small and medium-sized enterprises (SMEs) increased by £0.2 billion in January.

It is nice for once to see SME lending rising and if we switch to the detail around a third was for manufacturing. If we look for some perspective then the annual rate of growth for total business lending has risen to 4.2% which may be hopeful although I consider lending to be more of a lagging than a leading indicator.

Unsecured Credit

This has been on something of a tear such that the Bank of England has been able to call circa 7% annual growth rates an improvement. However there was something of a turn the other way in January.

The extra amount borrowed by consumers to buy goods and services increased to £1.1 billion in January , slightly above the £0.9 billion monthly average since July 2018, but below the £1.5 billion average between January 2016 and June 2018. Within this, credit card lending picked up after a weak December and other loans and advances increased slightly on the month.

So the Bank of England is still able to report an improvement as we note the monthly rise.

Annual consumer credit growth continued to slow, reaching 6.5% in January. The monthly flow of consumer credit was marginally higher in January than the recent average.

But even at 6.5% it is far higher than anything else in the UK economy at around double the increase in wages and quadruple the rate of economic growth.

Manufacturing PMI

There is a link between the data above and this as we see this in the report.

Efforts to stockpile inputs were aided by a solid expansion of purchasing activity at UK manufacturers. This was also felt at suppliers, where the increased demand for raw materials led to a further marked lengthening in average lead times (albeit the least marked since January 2017).

So we see that manufacturers have borrowed to build up stocks which seems sensible to me. This meant that overall we did well.

The headline seasonally adjusted IHS Markit/CIPS
Purchasing Managers’ Index® (PMI®) fell to a four-month low of 52.0 in February,

The reason why I think that is good is because if we look at the Euro area for example it had a minor contraction at 49.3 with Germany at 47.6 pulling it lower. Anyway for a different perspective here is how fastFT has covered this.

UK manufacturing outlook dimmest on record, key survey shows

I fear for what they must make of Germany don’t you?

Comment

There is a lot to consider here but let us start with the economic outlook which looks steady as she goes from the monetary data set. Not much growth but some as we bumble along. On a conceptual level this poses a deep question for the Bank of England which has interfered in so many markets yet claims that economic growth now has a “speed limit” of 1.5% conveniently ignoring its own role in this. Also why did it end the narrow money supply data which works well as a leading indicator?

Much may happen at the end of this month as we wait to see what and indeed if any form of Brexit starts at the end of it. But we continue to borrow heavily on an unsecured basis and even with the better number in January be far less enthusiastic about small business borrowing. Just as a reminder the Funding for Lending Scheme of the Bank of England was supposed to provide exactly the opposite result.