This morning’s BoE data (for June) contained two potential downsides: (i) weak corporate borrowing, actually involving net repayments on the month even on the broader total external finance measure and a rise in borrowing rates equivalent to a 25bp MPC rate hike; (ii) a fall back in foreign demand for UK government securities. Against that, household borrowing and mortgage approvals picked back up a little and mortgage borrowing rates edged down further, bringing their fall in recent months equivalent to a 25bp MPC rate cut.
This may increase MPC concerns about the recovery being unbalanced, with weak PNFC borrowing inhibiting a capex pickup. But the industrial data show that weak lending has (surprisingly) been driven by the service sector and rebalancing has somewhat disappeared from recent MPC comments. The monetray policy implicatons are nuanced: at the margin it may make MPC more dovish (within their recent more hawkish turn) if they worry that a lack of investment could undermine the economy’s long-term health and judge that the housing market is not too frothy.
The lower foreign demand for UK assets could also conceivably reignite debates about the financing of the UK’s large current account deficit. But MPC have recently been sanguine (e.g. Carney and Miles at the TSC hearings, see my previous blog), which I largely agree with, and the data can be erratic or the tentative decline could reflect lower demand for safe haven assets. The monetary policy implications are again complicated (which could explain why the MPC have backed off talking about the current account) but if lower foreign demand for UK assets reduces the nascent upward pressure on GBP, at the margin it may make MPC more hawkish (even if strong UK domestic demand does not underlie the current account deficit).
Increased household-corporate divergence in the borrowing trends (flows and rates)
M4L(ex) was weak in June, with a flow (£1.4bn) around a third of its 6m average. And the recent picture of improving household (mortgage) borrowing but moribund corporate borrowing became more pronounced, even when the broader measure of corporate total external finance is considered. And borrowing rates have been moving in opposite directions. So this could make MPC more concerned that the long hoped-for rebalancing of the economy faces an uphill battle, potentially ameliorating their recent hawkish shift. In particular:
• June mortgage approvals were, at 66,582, slightly stronger than market expectations and above the 6m average of 62,971. But they remain below the 68,051 reported in April. The BBA last week discussed the potential for a near-term post-election bounce in housing activity, as uncertainty about mansion taxes and other government policies was resolved.
• The flow of M4 lending to households was £0.9bn above its 6m average, causing the 3m (ann) and 12m growth rates to edge up to 2.9% and 2.5% respectively. Mortgage borrowing also edged up, although a 3m(ann) growth rate of 2.2% is hardly bubble territory. But yesterday’s land registry data show house price growth picking up from 4.6% (yoy) to 5.4%. And the BoE data show mortgage rates continued edging down in June – the 2y fixed rate (75% LTV) fell to 1.83% from 1.90%, the lowest on record and down by 25bp since December i.e. equivalent to a BoE rate cut. Press reports suggest that this is about to come to an end as rates are raised in the wake of the more hawkish MPC comments. But the apparent ex ante imbalance between strong buyer demand and weaker supply of properties onto the market suggested by RICS data, as noted by April MPC minutes, suggests that we may not have seen the end of headlines about rising house prices.
• By contrast, PNFCs made net M4 lending repayments of £2.0bn, compared to average borrowing of £0.2bn over the previous 6 months. So the 3m(ann) growth rate fell by 4.0pp to a worrying -2.0%, with the 12m growth rate falling to -0.7% from -0.3%. Indeed, the 12m growth rate is actually lower than in the EA (as discussed in my recent blog). That said, an FT report claiming that this was a record fall PNFC lending is incorrect in several respects. But it is notable that, in contrast to the picture for mortgages, lending rates to PNFCs have generally edged up over recent months – the effective PNFC borrowing rate has risen by 27bp since February i.e. equivalent to a BoE rate rise.
• Moreover, the wider measure of corporate total external finance was also weak at -£0.8bn (i.e. net redemptions) compared to average finance raised of £2.3bn per month over the previous 6 months. Here negative commercial paper and bank financing outweighed positive equity and bond finance (see chart) which were in any case not particularly strong. And external financing flows look to have been slowing since the start-year bounce, which is not auspicious for capex prospects (although election uncertainties could have contributed).
• The BoE’s industrial data reveal, interestingly, that the weak borrowing is mainly a service sector phenomena rather than a problem with production industries. So the common perception that manufacturing is in difficulty is challenged by these data (distress borrowing seems unlikely). In particular, non-financial service sector companies repaid £5.4bn in lending in June (business services -£4.4bn) to turn their 12m borrowing growth rates negative again. In contrast, production industries’ 12m borrowing growth rate rose to 11.0% in June, with the manufacturers’ figure reaching a record high of 13.1% (although the data only start in 2010).
Net foreign sales of UK government debt, could raise current account nervousness
The separate BoE Bankstats release contains the hidden gem of the monthly foreign purchases of UK government debt, the most timely official read on such foreign demand. My 2 July blog noted how such demand had strengthened in recent months, despite the electoral uncertainties, consistent with UK assets representing safe havens. So it’s interesting that the latest data show foreigners selling £4.3bn of gilts in June, albeit partially offset by purchases of T-bills and other instruments to give total net sales of £0.2bn. But that’s still a big turnaround from recent months and noticeably reduces the 3m sum series (which I prefer to focus on to smooth through volatility). And the resolution of election uncertainty might have been expected to have raised demand for UK assets. Of course it could just reflect the volatility of the underlying data, although I’m assuming that there hasn’t been a repeat of the gremlins from a couple of months ago. And the lower flows could in principle reflect lesser global demand for safe havens, given investors’ apparent nonchalance in June about GREXIT risks (although this argument seems like a bit of a stretch).
So at the margin this could make MPC a bit more nervous about the financing of the UK’s large current deficit. Recent MPC comments have been sanguine – my 2 July blog noted how Carney and Miles gave several reasons for not worrying e.g. it had been caused by lower income of EA investments which seemed likely to reverse as the EA recovered and the net international investment position had actually improved thanks to valuation effects (see my BoE QB Article on this).
M4 also weakened a bit, but less of a story
M4(ex) was also weak in June, with a flow of just under half of 6m average causing fall in both the 3m (ann) and 12m growth rates (to 3.8% and 3.6% respectively). The sectoral story is a bit less clear here – with PNFC 3m (ann) growth ticking down nearly 4pp but to a still robust 8.7% while the 3m (ann) growth rate of household M4 ticked up but to a more modest 4.1%. And the relative strength story was reversed in the 12m growth rates.