Money & Credit (Jan.) - Capital Economics
UK Economics

Money & Credit (Jan.)

UK Data Response
Written by Ruth Gregory

The COVID-19 lockdown pattern of households paying back credit and investing in property but small businesses loading up on debt was repeated in January. And we expect a continuation of these trends until the restrictions are eventually lifted.

Households continued to repay consumer credit, small businesses still borrowing

  • The COVID-19 lockdown pattern of households paying back credit and investing in property but small businesses loading up on debt was repeated in January. And we expect a continuation of these trends until the restrictions are eventually lifted.
  • Consumers used some of their forced savings during January’s lockdown to pay down £2.4bn of unsecured loans in January (consensus -£1.9bn). That was a faster pace of deleveraging than during November’s lockdown and so is another reason to think that the hit to GDP from January’s lockdown will be larger than November’s 2.3% m/m drop in GDP. What’s more, the amount of cash in households’ bank accounts rose by £18.5bn in January, albeit down from £20.8bn in December. Meanwhile, the number of mortgage approvals for new house purchases fell from 102,809 in December to 98,994 in January. But approvals were still 35% above their pre-crisis level. And a probable extension in Wednesday’s Budget of the stamp duty holiday from end-March to end-June will keep approvals elevated in Q2.
  • At least January’s lockdown did not lead to another surge in borrowing by non-financial businesses, suggesting that firms are no longer desperate for cash. In aggregate, non-financial corporates repaid £1.0bn of bank loans in January, after repaying £0.8bn in December. That said, while large businesses reduced their bank loans by £1.5bn, they sourced an extra £4.3bn of finance from the financial markets in January, up from £1.3bn in December. And small and medium-sized businesses were once again forced to take on more debt to survive. (See Chart 1.) They borrowed an additional £0.5bn from banks in January, although that was small relative to the average of £1.3bn borrowed in the past three months.
  • Finally, the rise in the amount of cash households and businesses are holding in bank and building societies meant that annual growth in broad money rose yet again, from 14.2% in December to a record high of 15.0% in January. (See Table 1.) But we think that excess capacity in the economy will prevent this extra liquidity from causing a surge in inflation in the next year or two.
  • Overall, high debt burdens and the possibility that the Chancellor raises the main rate of corporation tax in the Budget on 3rd March could act as a drag on business investment. But the strength of households’ finances suggests that not all the risks to our above-consensus economic forecasts are on the downside.

Chart 1: Bank Lending to SMEs & Large Businesses (% y/y)

Source: Bank of England

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

Oct.

34.6

13.2

7.7

3.9

3.6

1.9

-2.0

7.9

-0.7

-5.5

98,007

Nov.

33.8

14.0

18.6

4.5

4.4

2.0

1.4

8.7

-1.5

-6.5

105,009

Dec.

12.2

14.2

1.7

4.2

4.3

2.0

1.6

9.5

-0.9

-7.5

102,809

Jan.

30.6

15.0

-3.6

4.4

2.0

1.9

-2.7

9.2

-2.4

-8.9

98,994

Sources: Refinitiv, BoE


Ruth Gregory, Senior UK Economist, +44 (0)7747 466 451, ruth.gregory@capitaleconomics.com