No sign of boom in consumer spending

The latest money and credit figures suggest that consumer spending was subdued in September. Credit growth was still well below its pre-crisis average and, given retail sales volumes fell in September, the small rise in borrowing won’t be enough ease mounting concerns that the economic recovery is running out of steam. This means that rates may not rise as far or as fast as the market expects, even if the Monetary Policy Committee (MPC) does hike them later this year. 

Consumer credit borrowing reached £0.2bn in September, driven by a £0.6bn increase in credit card debt and partially offset by a £0.4bn decrease in car finance and personal loans. This was still well below the pre-pandemic monthly consumer credit average of £1.2bn. 

Of course, this could be because consumers are using savings to fund spending that they would previously have funded with borrowing. But households added another £9.4bn in cash to their holdings in September, suggesting that they aren’t running their savings down. At the same time, the effective rate on new personal loans rose to above 6%, the highest level since March 2020, and this may discourage additional borrowing.

Meanwhile, there was further evidence that the end of the stamp duty holiday is starting to cool the housing market. Approvals for house purchases ticked down to 72,600 in September, from 74,200 in August. This is the lowest since July 2020, but remains above pre-February 2020 levels. 

What’s more, businesses continued to focus on paying down debt accumulated during the pandemic. The net repayment by small and medium sized firms in September was £1.4bn, the largest on record (although larger business borrowed an additional £1bn).

Normally, a fall in borrowing by businesses would be a bad sign for future investment, but since many firms raised excess amounts of finance during the pandemic it’s not surprising that they’re repaying some of it. In fact, interest rates on new loans to SMEs fell from 37 basis points to 2.37% in September, despite the surge in interest expectations, and that’s a good reminder that there abundant liquidity remains in the market and access to credit is still very strong.

Overall, today’s data suggest that consumers are still in saving mode and that consumer spending did not drive a big increase GDP growth in September. And with energy price hikes, tax rises and higher fuel costs all eating into households’ disposable income, their real disposable income may be pretty flat over the next month – despite the measures announced in the Budget. Indeed, it still looks likely that the economic recovery will stagnate over the rest of 2021 and the first part of 2022.

Before it tightens monetary policy and adds an interest rate hike to households’ burdens, the MPC should pause and consider how the labour market and the economy more generally are reacting to these latest disruptions.