The UK’s ‘credit impulse’ just went sharply negative, and that explains why the Bank of England did not raise interest rates today

source
Pantheon Macroeconomics

  • The amount of new credit issued in the UK suddenly went sharply negative in Q1.
  • Consumers also abruptly increased their repayments of loans.
  • Together, the two spikes – one down, one upward – send a worrying signal that British consumers are afraid of what’s ahead.
  • That helps explain why the Bank of England did not raise interest rates today.
  • The stakes couldn’t be higher: The data suggest that consumers fear Prime Minister Theresa May won’t get a Brexit trade deal that keeps Britain close to the EU.

LONDON – The amount of new credit issued in the UK went sharply negative in Q1 2018, dipping to a level it has not seen in six years.

Consumers also abruptly increased their repayments of loans at the highest rate since records began in 2013, according to Pantheon Macroeconomics analyst Samuel Tombs.

Together, the two spikes – one down, one upward – send a worrying signal that British consumers are afraid of what’s ahead. GDP growth was just 0.1% quarter-on-quarter in Q1, and this is in part why the Bank of England did not raise interest rates at its scheduled announcement today.

loan repayment

source
Pantheon Macroeconomics

New credit is often measured by a metric called “the credit impulse,” which is the change in new credit issued as a percentage of GDP. New credit declined by £6 billion in Q1. “The credit impulse, therefore, now is deeply negative; the £6B year-over-year drop in lending equates to 1.2% of quarterly nominal GDP. The impulse hasn’t been this negative for the last six years,” Tombs told clients recently.

Industry survey data, measuring managers’ perceived health of the economy, has also collapsed:

UK PMI

source
Oxford Economics / CIPS IHS Markit

While some of the downturn in spending may have come from the multiple snow storms Britain suffered this winter, the weather does not account for the totality of the dip.

The news comes as the UK government is renegotiating its trading relationship with the European Union. Prime Minister Theresa May is trying to keep Britain’s economy closely tied to the EU by replicating its current customs union – which allows the free flow of goods across borders – with Europe.

But more conservative members of her government want a complete severance of ties. That would place a drag on the UK economy – Europe is its nearest, richest, and most established trading partner.

The stakes couldn’t be higher. The credit data suggest that consumers are afraid that May will not get her way.

“Most notably, the proportion of outstanding unsecured credit repaid by consumers has been rising steadily over the last six months and jumped to 3.0% in March, the highest rate since records began in 2013. This rise in debt repayments coincides with the fall in consumers’ confidence in April to its lowest level since the [EU Brexit] referendum,” he said in a note to subscribers.

Another look at that sharp drop in consumer credit.

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Another look at that sharp drop in consumer credit.
source
Pantheon Macroeconomics

Brits have also stopped shopping. Numbers from the British Retail Consortium out today show year-on-year consumer sales growth collapsed by -4.2% in April. The expectation had been -0.8%. The index didn’t get that low at any point during the 2008 financial crisis, when it dipped to -3.3 in 2009.

BRC retail UK

source
Investing.com

Previously, the Bank of England signalled the economy was robust enough to warrant a rate rise in May. Until Q1, the British economy had reacted to Brexit with surprising strength. The manufacturing sector enjoyed a boost in exports when the value of the pound went down after the EU referendum.

The fact that an interest rate rise didn’t happen suggests the central bank now regards itself as nursing a battered economy through a weak patch, not trying to curb the inflationary tendencies of high growth.

GDP

source
Pantheon Macroeconomics