Money & Credit (May) - Capital Economics
UK Economics

Money & Credit (May)

UK Data Response
Written by Andrew Wishart

The Bounce Back Loan Scheme restored access to credit for small and medium-sized enterprises in May. That increases the chances of a swift recovery but will also raise the fiscal cost of the crisis. Meanwhile growth in the money supply continued to accelerate, but we still doubt CPI inflation will even rise to the 2.0% target in the medium term.

SMEs don’t hesitate to take advantage of bounce back loans

  • The Bounce Back Loan Scheme (BBLS) restored access to credit for small and medium-sized enterprises (SMEs) in May. That increases the chances of a swift recovery but will also raise the fiscal cost of the crisis. Meanwhile growth in the money supply continued to accelerate, but we still doubt CPI inflation will even rise to the 2.0% target in the medium term.
  • The BBLS has released credit to small businesses that were previously unable to get it. Having stalled last month, lending to non-financial businesses increased by £9.6bn in May due to a £20bn increase in lending to SME’s. (See Table 1.) That was entirely driven by loans with a 100% guarantee from the government through the BBLS. HM Treasury data shows that £21.3bn had been lent out through the scheme by the end of May. Large business actually paid down debt in aggregate. (See Chart 1.)
  • There was clearly demand for credit from SMEs that banks were unwilling to satisfy previously. That may be because of the administrative burden of checking credit quality – there were 873,192 applications by the end of May. But at least in part, it will be because some of these firms are not creditworthy. So, while the scheme will save some viable businesses, it will also increase the fiscal cost of the crisis.
  • Following a £7.4bn reduction in household debt in April households paid down a smaller £4.6bn of debt in May. That reflects households starting to increase their spending again, as evidenced by the partial recovery of retail sales. Nonetheless, the fact that households are paying down debt when many have seen their income cut by 20% and some have become unemployed shows consumer spending remained weak.
  • Meanwhile, there was an unexpected further fall in mortgage approvals from 15,851 in April to 9,273 in May (consensus 25,000) suggesting that the housing market is getting back to its feet more slowly than some estate agents would have you believe. Typically, there are about 65,000 mortgage approvals a month.
  • Overall, the monetary and fiscal policy stimulus in response to the crisis has caused growth in the money supply to accelerate. Annual growth in M4 rose from 9.5% to 11.9%, the fastest pace since the Global Financial Crisis. But this is unlikely to make up for the fall in demand which will result from the coronavirus, so concerns about this fuelling inflation in the short and medium term are unjustified in our view.

Chart 1: Outstanding Loans to Businesses (£bn)

Source: Refinitiv

Table 1: Lending Figures

Broad Money (M4)

Total Lending

Household Lending

PNFC Lending

Consumer Credit

Mortgage App’s

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

000s

Feb.

12.6

5.1

16.2

5.2

4.5

3.8

-0.4

1.9

0.9

5.7

74

Mar.

81.5

8.2

61.6

7.1

1.2

3.6

28.8

8.7

-3.8

3.6

56

Apr.

40.4

9.5

-7.1

7.0

-7.4

2.8

0.0

8.1

-7.4

-0.4

16

May

54.6

11.9

-6.5

6.8

-3.4

2.3

9.6

10.3

-4.6

-3.0

9

Sources: Refinitiv, BoE


Andrew Wishart, UK Economist, +44 7427 682 411, andrew.wishart@capitaleconomics.com