Today the focus switches to the Bank of England and in technical terms it will be starting 2023 in good cheer. That is because its financial stability or “Not QE” bond purchases have mostly been unwound and it looks set to make a profit of around £5 billion on them. So it will be able to provide a boost to the UK Treasury when it hands over the cash. But whilst one part of central banking went well the New Year has provided examples of areas where things have gone far from well.
Food inflation hit a record annual rate in December as cash-strapped households prepared for Christmas, according to a retail sector report.
The latest British Retail Consortium-NielsenIQ shop price index showed typical food grocery costs up 13.3% last month compared with December 2021.
The rate had stood at 12.4% in November. ( Sky News )
Even central bankers these days struggle to dismiss this as an example of a non-core item. The media mostly bypassed another part of the same report though.
Non-food price rises eased as some retailers used discounting to shed excess stock built up during the disruptions to supply chains, meaning some customers were able to bag bargain gifts. The combined impact was that price increases overall plateaued, with the reduction in non-food inflation offsetting the higher food prices. ( British Retail Consortium)
So there was a slight dip in overall shop inflation from 7.4% to 7.3% although that of course is way over the inflation target and whilst heading in the right direction still signals a major issue.
The improved inflation news was presumably a response to this highlighted by the S&P Purchasing Manager Index for manufacturing yesterday.
“The UK manufacturing downturn took a further turn for
the worse at the end of the year. Output contracted at one
of the quickest rates during the past 14 years, as new order
inflows weakened and supply chain issues continued to
bite. The decline in new business was worryingly steep,
as weak domestic demand was accompanied by a further
marked drop in new orders from overseas.”
So not so hot and the Financial Times has weighed in too.
But Britain’s downturn looks set to be both deeper and more prolonged. Forecasts compiled by Consensus Economics show UK GDP shrinking by 1 per cent in 2023, compared with a contraction of just 0.1 per cent for the eurozone as a whole and growth of 0.25 per cent in the US.
Although the logic in the Financial Times article is rather flawed.
“The 2023 recession will feel much worse than the economic impact of the pandemic,” said John Philpott, an independent labour market economist. Others described the outlook for consumers — especially those on low incomes or mortgage deals that were set to expire — as “tough”, “bleak”, “grim”, “miserable” and “terrible”. “The combination of falling real wages, tight financial conditions and a housing market correction are as bad as it gets,” said Kallum Pickering, senior economist at Berenberg bank.
Only yesterday we noted that real wages are falling faster in the Euro area than the UK. The FT is hot on the issue of mortgages which are an issue although a lagged one these days, But mostly it continues to grind its Brexit axe although to to be fair I agree 100% with this bit.
A significant minority said the UK was suffering from ministers’ outright incompetence.
Although I think they should also tell us who it was who thought that ministers were competent!
Consumer Credit
We can stay with the cost of living crisis as this part of the Bank of England money and credit release from this morning rather leaps off the page.
Individuals borrowed an additional £1.5 billion in consumer credit in November, on net, following £0.7 billion of borrowing in October (Chart 2). This was higher than the previous 6-month average of £1.1 billion.
That feels like one way of financing the cost of living crisis and more detail suggests credit cards took the main strain.
The additional consumer credit borrowing in November was split between £1.2 billion on credit cards, which increased from £0.4 billion in October, and £0.3 billion through other forms of consumer credit (such as car dealership finance and personal loans).
This all happened in spite of the fact that much borrowing was getting more expensive.
The effective interest rate on interest-charging overdrafts in November increased by 20 basis points, to 20.93%. The effective rate on new personal loans to individuals increased by 64 basis points to 7.87% in November, the highest level since December 2017 (7.96%).
Although that did seem to bypass credit cards explaining perhaps the shift towards it.
Conversely, the effective rate on interest bearing credit cards dropped slightly to 19.24% in November, from 19.31% in October.
Mortgage Approvals
There was a clear impact here from what we might call the Liz Truss Experiment.
Approvals for house purchases, an indicator of future borrowing, decreased to 46,100 in November, from 57,900 in October, the lowest level since June 2020 (40,500). Approvals for remortgaging (which only capture remortgaging with a different lender) fell to 32,500 in November from 51,300 in October, and were below the previous 6-month average of 48,100.
There is a direct link with this bit.
The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 26 basis points to 3.35% in November. The rate on the outstanding stock of mortgages increased by 9 basis points, to 2.38%.
I would not get too hung up on the rather odd “effective rate”. I have been talking to them about this and they do realise that mortgage rates went to 6% ( in this instance they have the 2 year fix with 25% equity as 5.97%). They are attempting to cover the overall situation although presentationally it is misleading as best of luck getting a 3.35% mortgage rate!
Although so far the actual mortgage lending figures have not been affected we can expect them to be along soon enough.
Net borrowing of mortgage debt by individuals increased from £3.6 billion to £4.4 billion in November
Partly the effect was technical as it seems people reduced their payments where they could.
Gross lending decreased from £27.7 billion in October to £25.7 billion in November, while gross repayments dropped from £25.8 billion to £21.6 billion
We know that this is a priority area for the Bank of England and they will be watching it closely.
Comment
We can start with yesterday’s theme which is that the Bank of England has set policies which benefited asset owners ( lower interest-rates and QE bond buying) and punished workers and consumers. First by higher house prices and in 2022 as inflation impacted real wages.
Now we have a swerve as whilst we expect some relief from lower house prices as we move further into 2023 new home buyers are seeing this.
The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 26 basis points to 3.35% in November
Meanwhile back in the real world those taking out a mortgage were paying more like 6% which will be a drain on finances. Unless you are well off enough to not need a mortgage via perhaps the Bank of Mum and Dad which means that the wealthy are winning yet again.
Finally we may be able to discern something from the money supply data that was so distorted by the events of late last September.
The net flow of sterling money (known as M4ex) decreased to -£26.6 billion in November, from -£19.0 billion in October
This was a continuation of the reset after September but the numbers for both 3 month and annual broad money growth are now both approximately 4%. With inflation in double-digits quite a brake is being applied.
Also savers may be approaching the Charlie Bean Zone at least in nominal terms.
The effective interest rate paid on individuals’ new time deposits with banks and building societies was little changed, at 3.27% in November. The effective rate on the outstanding stock of time deposits increased by 29 basis points to 1.36% in November, the largest monthly increase since December 2021 when Bank Rate increases began.