Consumer credit shrinks to lowest in a year, though mortgages rebound

Bank lending figures paint a mixed picture for households and businesses, with a further reduction in consumer credit but a rise in mortgage approvals and business lending.

Consumer credit growth eased to its lowest rate in a year and its second lowest in three years at 9.8% as the July flow was a little weaker than recent months, data from the Bank of England showed on Wednesday.

Net consumer credit in July surprisingly fell to £1.2bn from £1.4bn, the Bank revealed, when an increase to £1.5bn had been forecast.

Mortgage approvals increased to 68,689 from a weaker few months to the levels seen at the beginning of the year, well up from 65,318 the previous month and higher than the 65.5K consensus expectation.

The BoE's most recent credit conditions survey revealed that a majority of lenders intend to reduce the supply of secured credit in the current quarter.

Growth in lending to businesses held steady at 3.1% in July, broadly in line with the average seen over the past year, though the £8.9bn increase in borrowing by private non-financial corporations from all sources was the biggest rise in three years.

Lending to non-financial businesses rose to £8.1bn, with loans to large businesses rising but offset a little as those to small and medium-sized businesses decreased £0.2bn.

The money and credit figures will help to assuage fears that the slowdown in the housing market isn’t gathering pace, said Paul Hollingsworth at Capital Economics, though he acknowledged July’s rise in unsecured consumer credit was lower than expected, leaving the annual growth rate in single-digit figures for the first time in over a year.

"But given that credit is still rising fairly strongly, it suggests that households are confident enough to borrow in order to maintain spending while real incomes are being squeezed."

With firms’ investment intentions having held up relatively well, he felt bank lending to firms is unlikely to lose much pace over the coming months. "Overall, then, the latest money and credit statistics provide another reason to think that the economy has maintained a reasonable amount of momentum in the third quarter."

After months of largely unchanged dynamics, Barclays economists wondered whether the easing in consumer credit "is an illustration of a more material slowdown in consumer finance", pointing to macro conditions pointing to a further slowdown:stagnant real income and low savings ratios significantly stretching households financially, banks tightening unsecured credit conditions and are expected to tighten further as the regulator raises capital requirements, plus a slowing car finance sector.

"A gradual cooling in unsecured credit would be welcome in order to avoid having to pop the bubble at a later stage, likely triggering more disruptive consequences," Barclays said, forecasting consumer credit to slow further.

For Samuel Tombs at Pantheon Macroeconomics, the increase in corporate borrowing is the most eye-catching figure in the latest money and credit release but that this and the rise in mortgage approvals are both likely to be "blips".

He said the corporate surge, following June’s £8.7bn increase, "could be a sign that firms are about to invest more" but admitted this interpretation jars with the recent decline in business confidence and the still subdued levels of surveys of investment intentions.

"It’s more plausible, then, that the surge in corporate borrowing reflects firms fearing higher interest rates and locking in low borrowing costs."

Meanwhile, Tombs said the 0.3% increase in households’ broad money holdings month-to-month in July, dragging down the year-over-year growth rate to 3.3%, from 3.7% meant households’ real incomes, therefore, still are rising only incrementally, given that CPI inflation was 2.7% in July.

"July’s increase in net consumer credit also was the smallest since December, suggesting that consumers will take a back seat again in driving GDP growth in Q3."