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Money & Credit (Jun.)

Consumers borrowing more to cope with higher inflation

  • The chunky increase in unsecured borrowing in June suggests that households are having to rely more on credit due to the cost of living crisis. But households won’t be able to fully offset the hit to their real incomes from high inflation this year, which is why we think the economy will soon slip into a recession.
  • The £1.8bn rise in consumer credit (consensus £1.0bn) was larger than the £0.9bn gain in May and the pre-pandemic average of £1.1bn. The increase suggests that non-retail spending may be continuing to hold up a bit better than retail spending; we learnt last week that retail sales volumes fell by 0.1% m/m in June. (See here.)
  • That said, the increase in borrowing is also probably a worrying sign that many households are being forced to turn to credit to support their spending, due to surging inflation. Indeed, the rise in unsecured borrowing was driven by a £1.0bn leap in credit card borrowing. And the £1.5bn rise in cash sitting in households’ bank accounts, which was much smaller than the £5.2bn rise in May and the 2019 average monthly rise of £4.6bn, suggests households are also reducing their saving to cope with higher prices.
  • By increasing their borrowing and reducing their saving, households would probably only be able to mitigate some of the downward impact on their real spending power from higher inflation. As a result, while consumer spending could be a little more resilient in the near term than we previously thought, we think it will ultimately start to falter fall before long. Our forecast is for real consumer spending to suffer a peak-to-trough fall of around 2.5% between Q3 2022 and Q1 2022. (See here.)
  • Elsewhere, there was further evidence that higher interest rates are curbing housing market activity. The 63,726 of mortgage approvals in June was less than the 65,681 in May and the pre-pandemic average of 65,700. The average new mortgage rate has now risen by 65bps (from 1.50% in November to 2.15% in June), and we expect mortgage rates will rise further as the Bank of England continues to hike Bank Rate, by 50bps next week. (See Chart 1.) That will cause demand to deteriorate even more in the coming months.
  • Overall, June’s money and credit data add to signs that higher inflation and higher interest rates are taking their toll on households. With inflation and interest rates only set to rise further, we think outright declines in consumer spending will soon tip the economy into a recession.

Chart 1: Bank Rate & Average Mortgage Rates (%)

chart001-350.png

Sources: Refinitiv, Capital Economics

Table 1: Lending Figures

Broad Money (M4ex)

Total Credit (M4L)

H’hold Credit (M4L)

PNFC Credit (M4L)

Consumer Credit

Mortgage Apps For

m/m £bn

%y/y

m/m £bn

%y/y

m/m £bn

%y/y

m/m £bn

%y/y

m/m £bn

%y/y

Purchase 000s

Apr

1.5

4.8

-3.2

3.6

5.2

4.2

1.0

0.7

1.5

5.8

65,884

May

20.4

5.4

13.4

3.9

7.3

4.3

0.2

1.1

0.9

5.8

65,681

Jun

-2.9

4.4

-3.8

2.3

5.7

3.6

-2.7

-0.6

1.8

6.5

63,726

Sources: Refinitiv, BoE

Nicholas Farr, Assistant Economist, +44(0)20 7808 4080, nicholas.farr@capitaleconomics.com