What’s more, households deposited an additional £8.9bn into savings accounts in September, compared to £4.3bn in August and the average monthly net flow of £5.3bn during the past six months. This suggests that very weak consumer confidence is prompting households to spend less and save more in anticipation of tough economic times ahead.
All this is further evidence that the UK is already in recession, and will probably remain so until late 2023. Expect the recession to start in Q3 2022 and last until Q3 2023, with a peak-to-trough drop in GDP of about 2% – making it similar in size to the early 1990s recession.
The slump in retail sales volumes of 1.4% m/m in September is a clear sign that consumers are already spending less. This runs counter to our assumption that consumers would spend some of their savings to offset the hit to their real incomes from the cost-of-living crisis. If they increase their savings rather than their spending, that would exacerbate the recession.
Meanwhile, the unequal nature of these excess savings means some households already have depleted their savings. The proportion of households that could not afford an unexpected but necessary expense of £850 has risen to 30% in mid-October, from 25% in December, according to the ONS’ Opinions and Lifestyle survey.
Some signs of a cooling housing market
Approvals for house purchases are an indicator of future borrowing, and they also decreased significantly – down from 74,400 in August to 66,800 in September. Admittedly, the number of approvals was exceptionally high in August. But this is probably just the start of a decrease in demand for new mortgages. The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 29 basis points to 2.84% in September.
This is likely to jump in October, leading to a fall in new mortgage approvals and eventually to a drop in house prices of around 10%. However, 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
There was also evidence that businesses are exercising more caution in their borrowing decisions. UK non-financial businesses borrowed £2.6bn in September, on net, compared to £7.6bn of net lending in August. Within this, large non-financial businesses borrowed, on net, £2.7bn in September, compared to £ 7.7bn in August. This result tallies with our Q2 MMBI report, which found that a majority of middle market businesses were reducing their debt levels.