Log in Open account
Singapore
UK credit impulse contracts for seven consecutive quarters

UK credit impulse contracts for seven consecutive quarters

Macro 5 minutes to read
Christopher Dembik

Head of Macroeconomic Research

Summary:  There has been a handful of good data released in the United Kingdom in recent weeks but it would be misleading to see this as a sign that growth is on the verge of a prolonged rebound.

In fact, the UK economy is going through a false stabilisation that won’t last long. Q1 UK growth has returned to the average of the G7 countries, but this is mostly due to stockpiling ahead of March 31, the initial Brexit deadline. This is not the sign of a very dynamic economy in our view. It also primarily reflects lower growth momentum in the G7, not real stronger momentum in the UK. In addition, consumer surveys are rebounding but this is mostly caused by higher wages (+3.4% YoY in Q1 2019 according to the latest OECD update) and postponed Brexit.

We identify a bunch of risks that could derail growth in coming quarters:

- The likelihood of no-deal Brexit at the end of October 2019.
- Deterioration in the trade war front that could impact more negatively the global supply chain.
- The lack of money supply growth in main economies is leading to low growth until at least mid-end of 2020.
- The risk of recession in the US has significantly increased for 2020. Based on leading indicators, the probability is now comparable to the probability measure in advance of the last 3 recessions.
- Rising tensions between the United States and Iran in the oil-strategic routes of the Strait of Hormuz that could lead to disruptions in the global oil market.
More fundamentally, even if none of these events materialises, which is rather unlikely, the UK economy is condemned to a prolonged period of low growth. The number one issue of the British economy is not really Brexit but the lack of new credit growth which is essential in a highly leveraged economy.

Our leading indicator, the credit impulse, is tracking the flow of new credit in the economy and explains economic activity nine to twelve months forward with an “R2” of .60. As of now, UK credit impulse has been in contraction for seven consecutive quarters and is currently running at minus 4.4% of GDP. The length of the contraction is similar to that of the GFC but with a smaller amplitude. The lowest point reached in the post-referendum area was minus 7.4% of GDP versus a drop up to minus 20% of GDP in 2009. 
Prolonged contraction in UK credit impulse marks the end of the massive credit boom that started in 2015 and lasted until 2017 and will ultimately constraint in the long run private consumption, which contributes to roughly 60% of GDP.

In the chart below, we have plotted the evolution of the flow of new personal loans and overdrafts since 2002 as a proxy of UK household financial stress. It has been in contraction since April 2018 and is currently back to where it was in 2011, at minus 1.8% of GDP. 
Real higher wages are bringing some relief to UK consumers at the moment, pushing a bit up the saving rate from historically low level of 3% reached after the referendum, but it is likely to be short-lived as Brexit – no matter which trade and political agreements will prevail with the EU – will undoubtedly have negative ripple effects on businesses, labor market and growth due to higher uncertainty. In a more constrained economic environment, companies will be more reluctant than now to keep lifting pay by cutting their margins, even in a context of full employment. 

On the top of that, the risk of policy error has significantly increased. In 2010, the credit cycle has rebounded very fast and strongly after recession due to the Bank of England lowering interest rates and the massive injections of liquidity in the financial system. In post-Brexit UK, such a stimulus is unlikely. The BoE has lately sent very mixed messages about the next move of monetary policy, pointing out risks to growth at its latest Monetary Policy Committee meeting but also expressing concerns about household inflation expectations that keep increasing above 3% up to 5 years.

Though it is getting more or more likely that the next move will be an interest cut rather than a hike, the UK central bank has less room than the Fed and the European Central Bank to stimulate growth in a context of high inflation expectations. This monetary policy dilemma makes a move in terms of fiscal policy even more urgent than before to mitigate the Brexit impact.

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
    Read full article
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

    Read full article
  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
    Read full article
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
    Read full article
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

    Read full article
  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
    Read full article
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
    Read full article
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
    Read full article
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
    Read full article
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
    Read full article

Disclaimer

 The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore
Products & pricing
Platforms
Accounts & service
General
Other
Legal

Losses can exceed deposits on margin products. Please ensure you understand the risks.

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.