Money and Credit: growing signs of revival across the economy

There were signs of revival across the economy in April as credit flows picked up. This suggests an increase in consumer and business confidence as well as willingness to borrow to spend. That should translate into stronger economic activity in Q2.

A jump in mortgage approvals to the highest level since September 2022, suggests the housing market has continued to improve. Higher consumer credit growth suggests consumers are a little more willing to borrow to spend and non-financial businesses raised the most amount of finance since May 2020, suggesting business confidence is also improving.

Housing market recovery in train

The increase in mortgage approvals from 60,500 to 61,300, the sixth consecutive increase and the highest level since September 2022, suggests that life may be starting to return to the housing market.

Even though financial markets are starting to fret about when the first interest rate cut will come, the effective interest rate on newly drawn mortgages still decreased by 17bps. Admittedly, some of this has been reversed over the last few weeks, which will impact affordability. But the housing market is likely to continue to improve and prices will probably start to rise from Q2, supported by an increase in real incomes. A gradual rebound in housing transactions will also support an economic recovery later this year.

Consumers more willing to borrow

Meanwhile, the increase in consumer credit from £1.4bn to £1.6bn is encouraging. The increase was mainly concentrated in credit card spending, which rose from £0.5bn to £0.7bn. This takes borrowing back in line with it’s six-month average. We already know retail sales volumes were flat in March, so this may mean either non-retail spending was a bit stronger, or households are becoming more willing to use credit. The latter may be a sign of improving confidence.

That said, households continued to accumulate liquid assets at a faster pace than they did before the pandemic in March. Replenishing their rainy-day fund is now a priority for many people that ran down their savings to sustain their standard of living when CPI inflation shot up in 2022. However, given that the unsecured credit-to-income ratio is still 3pp lower than on the eve of the pandemic, we continue to expect above-trend growth in consumers' spending and GDP this year.

Corporates ramping up debt issuance

The huge £10.2bn jump in the amount of capital raised by private non-financial corporations was the largest amount since May 2020 and is also an encouraging sign that business confidence is returning. Admittedly, big jumps in bond issuance like this can be heavily influenced by the timing of bond sales and standard capital management. And some of the proceeds from bond sales have been used to buy back equity rather than invest. But after a long period of companies focusing on paying down credit, it is potentially a sign that businesses are willing to borrow more.

The upshot is that today’s data supports our view that the recession at the end of last year is already over and that growth is starting to pick up. However, it won’t be until the second half of the year when we should see a big improvement as inflation fall sharply, interest rates start to be cut and households real incomes continue to rise. That should set the scene for a return to more robust levels of growth in the second half of 2024.

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