The Bank of England Money and Credit report for April noted some quite surprising facts. I quote from their summary, starting with mortgages:
- Borrowing of mortgage debt by individuals continued to decline from net zero in March to £1.4 billion of net repayments in April. This is the lowest level on record, if the period since the onset of the Covid-19 pandemic is excluded.
- Net mortgage approvals for house purchases fell from 51,500 in March to 48,700 in April, while approvals for remortgaging increased slightly from 32,200 to 32,500 during the same period.
- The ‘effective' interest rate – the actual interest rate paid – on newly drawn mortgages rose by 5 basis points, to 4.46% in April.
The implication is obvious. If mortgages are a major source of new deposits in UK bank accounts (and they are) that source is drying up because fewer loans are being made, whilst net repayments mean cash is being withdrawn from the active economy. That is bad news for other economic activity.
The move is being broadly compensated for by increased consumer credit. The Bank says:
- Net borrowing on consumer credit by individuals in April was broadly unchanged when compared to March, at £1.6 billion.
So, long-term indebtedness is being compensated by short term borrowing, suggesting increased vulnerability within the economy. That is not good news. It also implies large numbers of people using credit to meet short term bills.
The most significant trend was, however, the jump in saving:
- During April, households deposited an additional £3.6 billion with banks and building societies, following net withdrawals of £3.0 billion in March. Within the household deposits measure, net withdrawals of interest-bearing sight deposits decreased significantly from £14.5 billion in March to £5.4 billion in April.
- The combined net flow of both household deposits with banks and building societies and National Savings and Investment (NS&I) accounts amounted to £5.2 billion in April. This was a substantial increase from £0.8 billion in March, and above the average monthly net flow of £4.1 billion during the previous six months.
In effect, people are moving funds to higher interest-bearing accounts. This could be because of higher rates. It could be the start of the ISA year (although ISA activity tends to be high at the end of each tax year, and not at the beginning). It could also indicate people giving up on plans to spend. Again, this is not a sign of economic health.
And just in case you thought business might compensate for this:
- Private non-financial companies (PNFC) made net repayments of £3.7 billion in market finance. Non-financial businesses (PNFCs and public corporations) borrowed £0.5 billion of bank and building society loans.
So business is also in a net repayment situation, suggesting a reduction in the scale of its economic activity.
I read all of this as suggesting a recession is coming. Since that seems to be what the Bank of England wants they must be pleased with this. Whether those of concern for the well-being of low-income families should be is another matter.
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Thank you for another important piece which, somehow, the mainstream media does not seem able and/or willing to present with clarity, brevity and prominence.
Why?
Might it be accurate to refer to the Bank of England as “the financial arm of the government”?
Add to the Sectoral Balances analysis that UK exports to the EU are continuing to fall because of trade barriers and the question has to be asked is there anybody seeing the big Sectoral Balances picture in this government. I don’t see it. With Sunak attempting to hide his poor decisions in regard to Covid surely we can’t expect it from him and it’s very doubtful Hunt is doing it with his neurotic and ignorant continuing effort to balance the government’s books.
https://www.theguardian.com/politics/2023/jun/01/brexit-historic-economic-error-larry-summers-former-us-treasury-secretary
Meanwhile…..
World Food Prices Lowest in 2 Years
The FAO Food Price Index fell to 124.3 in May 2023, the lowest since April 2021, and compared to an upwardly revised 127.7 in April. Prices for vegetable oils went down 8.7%, a 6th consecutive decline, due to lower prices across palm, soy, rapeseed and sunflower oils. Also, cost of cereals fell 4.8%, standing now 25.3% below its record-high a year ago, prompted by a 3.5% decline in wheat prices due to prospects for ample global supplies in the upcoming 2023/24 season and the extension of the Black Sea Grain Initiative. In addition, cost of dairy dropped 3.2%, amid a steep drop in cheese prices. On the other hand, meat prices rose 1%, the 4th consecutive increase, amid higher demand for poultry and bovine meat. Also, sugar prices extended gains for a 4th month and were up 5.5%, amid rising concerns over how the development of the El Niño phenomenon may affect the 2023/24 crops, together with lower-than-earlier-expected global availabilities in the 2022/23 season.
https://tradingeconomics.com/world/food-price-index
Thanks
Noted
This is key.
Profit margins are being maintained so owners of capital are maintaining real income….. the rest are poorer.
Is this the right way to spread pain?
The government his happy to intervene to inflict real pay cuts on public sector workers…. when will they inflict cuts in profits?
Mortgage debt reducing, consumer debt rising, bank deposits rising.
…. but for whom?
I suspect the relatively well off are postponing expenditure on houses and other stuff. Teresa May’s JAMs are borrowing to stay afloat. The strugglers are drowning.
In any case, things do not look good.
Please can you explain / justify why you think the Bank of England wants to create a recession?
I can’t see why they would choose to do this, or what they would gain by doing so?
First of all they say they want people to realise they are worse off, and that if they do not they will force this upon them. See comments by Huw Pill and Andrew Bailey.
Second, they think this necessary to control inflation because they insist on believing there is excess demand in the economy.
Third, to quite James Baldwin “I can’t believe what you say, because I see what you do.” What they are doing will result in recession.
Why do they want this? The obvious explanation is to force higher interest rates on the economy after fifteen years – which as bankers they think appropriate.
Several points:
Huw Pill and Andrew Bailey don’t work for the US, European, Canadian or even Indian central banks all of which have raised rates.
They haven’t made any comments about forcing people to be worse off if they do not realise they already are. Pill said people should recognise what he regards as reality, but if they don’t see reality his way he wasn’t threatening to make them poorer until they do.
Thirdly, there may be a recession – but you haven’t addressed how they gain by creating one. They don’t get paid more if the total compensation in the economy goes down.
There is compelling academic evidence that all central bankers think in the same way
You reveal your own (crass) bias by suggesting people only work for their own gain
Another neoliberal troll bites the dust
There may well be another factor in play here that’s being missed it’s essentially a Minsky insight. Given that most businesses operate on borrowing then in times of stress where uncertainty is in the air there will tend to be a need to “stretch liquidity” in the sense of businesses borrowing more to keep going. Private sector banks recognising this process is occurring will seek protection for their balance sheets by raising interest rates.
This is an argument for not giving central banks independence because their loyalties are inevitably split by the “staffing revolving door” coupled with neoliberal/neoconservative dogma that government has no money of its own. Of course we know that a monetarily sovereign government (or jointly with other governments) has enormous powers to remove stress from an economy and not just through its money creation powers but through a re-balancing of taxation for example. Clearly it would not go down well with voters for a central bank to admit it was raising base rate to protect the balance sheets of private sector banks or the finance industry as a whole so they cast around for other arguments like wage inflation!
See pages 144 and 145 in particular for more detailed explanation in Perry Mehrling’s excellent exploration of the importance of Minsky’s “left field” and subtle thinking:-
https://sites.bu.edu/perry/files/2019/04/The-Vision-of-Hyman-P.-Minsky.pdf
Musing on that
Maybe once they (the BOE) have flogged all their bonds to their city mates at 4% interest, they will allow bonds to rise (maybe even some QE just to help things along) letting said mates cash in on the tax free capital gain after they’ve reaped all their interest payments in the interim.
Who takes the hit? The taxpayer of course!
Just some overly simplistic Friday funday speculation 🙂
Richard. I have attached a link to Ellen Brown’s article re Financial Transaction Tax.
I appreciate that this relates to the US economy and not UK and the tax levels set may well be calculated differently, but the general principle could work in addressing the difficulties much of our population are currently experiencing while those with plenty of capital to spare are still gaining.
https://scheerpost.com/2023/06/01/ellen-brown-another-look-at-the-financial-transactions-tax/?utm_source=substack&utm_medium=email
The absurd thing is NY has an FTT amenity is waived
I have worked with those trying to end the waiver