Brian BollenThe monetary statistics just released by the Bank of England this morning provide further ammunition for those who argue that the UK economy is slipping out of forward gear. Broad money fell by £0.8bn in July. This is the first negative outturn since April 2016.
Broad money comprises sterling cash and holdings of sterling deposits and similar short-term sterling liabilities including repo positions. Credit comprises sterling borrowing from UK monetary financial institutions.
This includes loans, overdrafts, securities issuance, reverse repo and similar instruments.
Courtesy of Pantheon Macroeconomics using BofE data
Household money increase
Household money increased by a similar amount to the recent average. But this was largely offset by a fall for non-intermediate other financial corporations (NIOFC). Private non-financial corporation (PNFC) money fell by a small amount, the first fall since April 2016.
The net flow of sterling credit was close to zero in July. Increases in both household and PNFC borrowing were almost fully offset by a fall in NIOFC borrowing. The £3.6bn flow of net secured lending to individuals in July was similar to recent months.
Courtesy of Pantheon Macroeconomics using BofE data
Some data positive
Not all the figures were stagnant or negative. At 68,689, house purchase approvals were stronger than recent months, returning to levels seen at the start of 2017. Remortgaging approvals, at 46,231, were also stronger and have been on a slight upward trend.
The annual growth rate of consumer credit fell to 9.8%, the lowest since April 2016, as the July flow was a little weaker than recent months. PNFC borrowed £8.9bn from UK MFI and capital markets in July.
Both represent the largest outturns since July 2014, the Bank says. Loans to large non-financial businesses increased by £8.2bn in July, with a particularly large increase in the manufacturing sector. Loans to small and medium-sized enterprises were down by £0.2bn.
Effective interest rates down
The Bank also published news on effective interest rates as part of its routine monthly cycle. Effective rates on new individual fixed-rate bonds over two years have fallen by 19 basis points (bp) from 1.48% to 1.29%.
Effective rates on new individual mortgages have fallen by 10bp from 2.05% to 1.95%. This is the first time the series has fallen below 2%, notes the Bank.
Borrowing jumps but consumers cautious
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, sums it up in one line: corporate borrowing jumps, but consumers turn cautious.
The rise in house purchase mortgage approvals was well above the consensus figure of around 65,500. But the increase in net consumer credit was below the average of the previous six months and below the consensus.
He describes the increase in PNFC borrowing - the biggest rise in three years - as the most eye-catching figure. The surge in corporate borrowing follows June’s similarly hefty increase. This could be a sign that firms are about to invest more, he notes.
Interpretation jars
But this interpretation jars with a recent decline in business confidence and subdued levels of investment intention surveys. “It’s more plausible that the surge in corporate borrowing reflects firms fearing higher interest rates and locking in low borrowing costs,” he says.
The risk of a rise, however, has receded since the June Monetary Policy Committee meeting, he adds. This suggests that corporate borrowing will fall back soon. The rise in mortgage approvals is probably just a blip, he says.
Consumer confidence and the number of people who think now is a good time to buy a house has fallen sharply in recent months. New buyer enquiries at estate agents have fallen in the four months to July, according to RICS (Royal Institution of Chartered Surveyors).
The Bank of England’s Credit Conditions Survey also revealed that a majority of lenders intend to reduce the supply of secured credit in Q3.
On the other hand
The interpretation of Paul Hollingsworth, chief UK economist at Capital Economics, illustrates neatly how the same data can be interpreted if seen through different prisms.
Given that credit is still rising fairly strongly, this suggests that households are confident enough to borrow in order to maintain spending while real incomes are being squeezed, he comments. Elsewhere, annual growth in lending to corporates held steady at 3.1% in July.
With firms’ investment intentions having held up relatively well, bank lending to firms is unlikely to lose much pace over the coming months, he adds.
“Overall, then, the latest money and credit statistics provide another reason to think that the economy has maintained a reasonable amount of momentum in the third quarter,” he concludes, in direct opposition to our headline and opening paragraph...
