Consumers are already battening down the hatches against what will almost certainly be an exceptionally tough winter. July saw a drop in borrowing, and a rise in saving.
However, households’ balance sheets are still exceptionally strong, so expect consumers to reduce their saving over the winter as a result of the 80% jump in energy prices taking effect in October. Combined with significant additional government support, it should mean that the coming recession is relatively mild, with a peak-to-trough drop in GDP of around 1%.
Net consumer credit rose by £1.4bn in July, a bit above its pre-pandemic average of £1bn – but down from the increase of £1.8bn in June. This was evenly split between higher credit card spending and other loans. What’s more, in July households deposited £4.6bn in bank and NS&I accounts in July, up from £3bn in June but well below the average monthly net flow of £5.6bn during the 12-month pre-pandemic average.
Given retail sales were up by 0.3% m/m in July, consumer spending clearly isn’t collapsing. It is, however, likely to slow sharply as consumers spend an ever-larger part of their incomes on energy and less on discretionary goods and services.
Some signs of a cooling housing market
Admittedly, approvals for house purchases, which are an indicator of future borrowing, rose from 63,184 in June to 63,770. But this didn’t reverse all of the falls we’ve experienced over the previous few months, and shows that housing activity is just slowing, not collapsing.
We think house prices are unlikely to maintain their current momentum as rising interest rates squeeze affordability. A fall of around 5% to 10% seems likely. We are not concerned about a slump in house prices for three reasons:
- their huge growth over the last two years;
- the strength of household balance sheets; and
- the tightness in the labour market.
Middle market borrowing remains subdued
UK non-financial businesses repaid £2.1bn of net loans from banks in July. Most of this (£1.8bn) was by large businesses, but small and medium sized non-financial businesses (SMEs) continued to repay debt.
The net loan repayment by SMEs in June marked the sixteenth consecutive month of net repayments. So, middle market businesses are still reducing leverage while large businesses are taking advantage of easy access to credit and negative real interest rates.
This result tallies with our Q2 MMBI report, which found that a majority of middle market businesses were reducing their debt levels. That said, inflation is set to average 9% in 2022 and 6% in 2023, so real interest rates will remain negative for a long time yet. In reality, this will create an environment that’s conducive to borrowing for investment.