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Bank of England Credit Data Tells of Nervous Consumers and a "Flatlining" Economy

Consumer spending

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UK consumers appear reluctant to throw off the caution accumulated after months of crisis conditions, opting to save the proceeds of their labour and investments.

The Bank of England's latest Money and Credit survey shows consumers borrowed just £0.4BN in August, well shy of the average +£1.2BN seen in the two years before the Covid pandemic.

The UK economy is one heavily centred around personal consumption and growth leans heavily on expenditure.

"The small £0.4BN rise in consumer credit in August supports other evidence that the economy is not doing much better than flatlining," says Paul Dales, Chief UK Economist, at Capital Economics.

The data comes before September's surge in energy prices and a run on the forecourts by consumers increasingly alert to global and domestic supply issues.

"With the current fuel crisis restraining activity (outside of spending on fuel), there’s a risk that at some point the economic recovery may take a small step backwards," says Dales.

Chart 1 Credit Survey

Demand for credit remains far short of where it was ahead of the crisis and data from the Bank of England confirms that consumers are not now simply running down savings accumulated during the crisis.

Dales says the £9.1BN increase in households’ cash deposits in August was bigger than the £7.1BN rise in July and the average rise of £4.7BN in the year before the pandemic.

"So it appears that the 0.9% m/m fall in retail sales in August was not offset by a huge surge in non-retail spending," says Dales.

Credit survey chart 2

Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, says consumers "need to lose this cautious mindset quickly if the recovery is to progress, given the looming drop in real disposable income in Q4".

The survey meanwhile revealed mortgage lending picked up again with a £5.3BN increase in August.

M4 money supply - the money circulating amongst the UK public and businesses - increased slightly from 7.9% in July to 8.2% in August, although this is still historically low.

"Overall, we’re becoming more worried that economy may soon take a step back. That would be food for thought for the Bank of England who appears intent on raising interest rates in the coming months," says Dales.

Chart 3 credit survey