Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
UK household credit impulse drops to near two-year low
Christopher Dembik
Head of Macro Analysis
Summary: The UK household credit impulse reading is one of the weakest among the developed market countries, and we see four major factors weighing on the negative trend in household consumption.
• UK credit impulse has been one of the lowest in DM countries, but recently returned to positive territory at 1.3% of GDP
• Household credit impulse still showing important signs of weakness
• Consumer spending, which accounts for about 60% of the UK’s economy, is at-risk to slow if political uncertainty continues
The UK credit impulse, which is a broad measure of new credit from the private sector based on BIS data, has been one of the weakest in DM countries, reaching a lowest post-crisis point at -7.7% of GDP at the end of 2017. The magnitude of the drop was almost similar to that of the 1992 recession. Unlike in the early 1990s, however, credit impulse has quickly returned to positive territory, and is now running at 1.3% of GDP. The rise in new credit, however, can mostly be explained by seasonal factors and underlying credit growth seems to be edging down. Annual outstanding credit to the private sector is slowly decelerating after reaching a year-on-year average level of 5.1% over the 2016-18 period.
Digging into the data, the UK credit impulse is negatively impacted by a contraction in new household credit. Our measure of new household credit, covering both housing and personal loans, is near a two-year low. Based on our most up-to-date data, the flow in new lending secured on dwellings, which serves as a proxy for new housing credit, is running at -0.9% of GDP while the flow in new personal loans is even lower, at -1.4% of GDP. Such a level hasn’t been reached since June 2013. Negative trend in household credit is expected to continue, due to Brexit uncertainty and worrying macroeconomic signals. We see four major macroeconomic and financial risks that will weight on household consumption this year.
• Household credit impulse still showing important signs of weakness
• Consumer spending, which accounts for about 60% of the UK’s economy, is at-risk to slow if political uncertainty continues
The UK credit impulse, which is a broad measure of new credit from the private sector based on BIS data, has been one of the weakest in DM countries, reaching a lowest post-crisis point at -7.7% of GDP at the end of 2017. The magnitude of the drop was almost similar to that of the 1992 recession. Unlike in the early 1990s, however, credit impulse has quickly returned to positive territory, and is now running at 1.3% of GDP. The rise in new credit, however, can mostly be explained by seasonal factors and underlying credit growth seems to be edging down. Annual outstanding credit to the private sector is slowly decelerating after reaching a year-on-year average level of 5.1% over the 2016-18 period.
Digging into the data, the UK credit impulse is negatively impacted by a contraction in new household credit. Our measure of new household credit, covering both housing and personal loans, is near a two-year low. Based on our most up-to-date data, the flow in new lending secured on dwellings, which serves as a proxy for new housing credit, is running at -0.9% of GDP while the flow in new personal loans is even lower, at -1.4% of GDP. Such a level hasn’t been reached since June 2013. Negative trend in household credit is expected to continue, due to Brexit uncertainty and worrying macroeconomic signals. We see four major macroeconomic and financial risks that will weight on household consumption this year.
Falling consumer confidence is weighing on the economy
If we agree on the assumption that the UK economy’s fate is held in the hands of the consumer (as consumer spending represents about 60% of the economy), the last GfK survey leaves little room for optimism. Consumer confidence is at its lowest level for five years and there is no hope of an imminent reversal. The general economic situation over the next 12 months is at -38 (the lowest point since 2012) and personal financial situation over the next 12 months is at -1 (the lowest point since July 2016).
The UK's gloomy consumer mood has already had an impact on some market segments such as the car industry. New car registrations, which are viewed as a leading indicator of the wider economy, went from 2.7 million to 2.3 million over the past 20 months – a 15% drop.
If we agree on the assumption that the UK economy’s fate is held in the hands of the consumer (as consumer spending represents about 60% of the economy), the last GfK survey leaves little room for optimism. Consumer confidence is at its lowest level for five years and there is no hope of an imminent reversal. The general economic situation over the next 12 months is at -38 (the lowest point since 2012) and personal financial situation over the next 12 months is at -1 (the lowest point since July 2016).
The UK's gloomy consumer mood has already had an impact on some market segments such as the car industry. New car registrations, which are viewed as a leading indicator of the wider economy, went from 2.7 million to 2.3 million over the past 20 months – a 15% drop.
Negative wealth effect due to lower house prices
Due to Brexit uncertainty, house prices have moved down over the past quarters. The trend is very negative in the prime London residential market, which has been in contraction since July 2017, but it is also worrying in the rest of the country. Based on nationwide data, overall residential real estate prices continue to slow, at 0.5% y/y in December 2018, the lowest level since early 2013.
As one-third of UK wealth household results from housing, negative wealth effect linked to weakness in home prices will also affect household confidence and consumption. We don’t expect any future improvements here, which means that the cooling in real estate will constitute another major challenge for the UK economy.
Due to Brexit uncertainty, house prices have moved down over the past quarters. The trend is very negative in the prime London residential market, which has been in contraction since July 2017, but it is also worrying in the rest of the country. Based on nationwide data, overall residential real estate prices continue to slow, at 0.5% y/y in December 2018, the lowest level since early 2013.
As one-third of UK wealth household results from housing, negative wealth effect linked to weakness in home prices will also affect household confidence and consumption. We don’t expect any future improvements here, which means that the cooling in real estate will constitute another major challenge for the UK economy.
Credit conditions are mixed
Credit conditions over the past three months covering Q4 2018 were poorer than they have been since mid-2014. Answering the question, “how has the availability of secured credit provided to households changed?”, lenders mostly confirmed a deterioration of the terms and conditions on which credit were provided.
The net percentage balance was out at -12.1. In contrast, for the next three months covering Q1 2019, lenders are more optimistic which can be at least partially explained by expectations that wage growth will continue to rise faster. However, underlying credit conditions are still rather unfavourable due to political uncertainty and the risk that the Bank of England might raise interest rates as soon as a window of opportunity occurs (probably in case of a soft Brexit) to counter inflationary pressures, notably in services.
Credit conditions over the past three months covering Q4 2018 were poorer than they have been since mid-2014. Answering the question, “how has the availability of secured credit provided to households changed?”, lenders mostly confirmed a deterioration of the terms and conditions on which credit were provided.
The net percentage balance was out at -12.1. In contrast, for the next three months covering Q1 2019, lenders are more optimistic which can be at least partially explained by expectations that wage growth will continue to rise faster. However, underlying credit conditions are still rather unfavourable due to political uncertainty and the risk that the Bank of England might raise interest rates as soon as a window of opportunity occurs (probably in case of a soft Brexit) to counter inflationary pressures, notably in services.
Household financial stress is rising
In the years after the referendum, the UK households that were already heavily indebted (debt-to-income ratio is 60% higher than that of the end of the 1980s, at 133%), tapped into their savings to maintain their standard of living. IAs such, that y/y household consumption expenditures remained at a high level until mid-2017, above 2.5%.
The impact of the Brexit referendum is very noticeable: the savings rate fell sharply in just a few quarters, from over 7% to an historical low point of 3.3%. It remains close to that level, at 4.3%. In the event of a prolonged economic slowdown or a more severe economic crisis, high household financial stress will prevent the UK economy from relying on household spending to cope with headwinds, ultimately accentuating the crisis.
In the years after the referendum, the UK households that were already heavily indebted (debt-to-income ratio is 60% higher than that of the end of the 1980s, at 133%), tapped into their savings to maintain their standard of living. IAs such, that y/y household consumption expenditures remained at a high level until mid-2017, above 2.5%.
The impact of the Brexit referendum is very noticeable: the savings rate fell sharply in just a few quarters, from over 7% to an historical low point of 3.3%. It remains close to that level, at 4.3%. In the event of a prolonged economic slowdown or a more severe economic crisis, high household financial stress will prevent the UK economy from relying on household spending to cope with headwinds, ultimately accentuating the crisis.
In sum, no matter what trade conditions prevail between the UK and the EU, t2019 will certainly mark the start of a new cycle of lower growth, higher financial risk and deteriorating household consumption. We can already draw an economic lesson from Brexit: any country that wants to follow the UK’s path will find the process much more complicated and economically costly than anyone thought.
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