UK Finance has published its latest update on lending figures. The figures showed that Economic growth was subdued in the first half of 2017, and estimates of growth in the three months to September are only expected to be slightly higher, at around 0.4%. This compares with 0.3% growth in the first and second quarter of the year.
This has not deterred the labour market, which continues to grow with more jobs. The number of people in work increased, with more than three-quarters of working age adults in employment, close to the highest rate ever. The unemployment rate was 4.3%, the lowest for 42 years.
Despite record low unemployment, wage growth remains stubbornly weak. In the past, this low rate of unemployment would typically have led to wage growth roughly twice its current rate. However, given weak productivity growth, increase in wages remains sluggish, at 2.2%.
All the while, inflation continues its upward march, reaching 3.0% in September. Inflation is likely to peak in October, before starting to fall. This said, the fall is expected to be gradual and modest so, in all likelihood, inflation will remain above the rate of pay growth for some time yet. As a result, workers are likely to see their spending power eroded further over the coming months.
A consequence of the pay squeeze is likely to be cutbacks in consumer spending. Retail sales data shows that growth in spending over the last nine months has slowed, with survey data indicating that households are responding to the pay squeeze by trading down or focussing on essential purchases. Car registrations also continue to be lower compared with a year ago.
The Bank of England Monetary Policy Committee (MPC) kept interest rates on hold in September, at 0.25%, but all eyes are now on its 2 November meeting to see if it decides to raise interest rates for the first time in over 10 years. The shift in tone of the MPC’s minutes last month was widely noted as being more hawkish.
Housing and mortgage markets
On the whole, activity in the housing market has built up modest momentum since the start of the year. The number of transactions has remained just above 100,000 each month since January, supported by recovering levels of house purchase approvals. House purchase approvals data, which covers just over two-thirds of the market, implies we can expect activity to recover a little further as we head towards the end of this year.
Looking at activity over the longer term, there’s been little movement in transactions since early 2014.
Within the 100,000 a month average figure, the activity mix has changed. Before March 2016, when the stamp duty change on second properties led to a jump in activity, roughly one-in-ten transactions were by landlords, but in August this year, the comparable figure was closer to one-in-17. Over the same period, first-time buyers have fared better, accounting for a larger proportion of house purchases, helped by government schemes such as the Help to Buy equity loan. Home movers and cash buyers have seen less movement as their share of the market remains unchanged.
More recently though, home mover numbers have shown some signs of growth, helped by low mortgage rates as their debt service costs reach historic lows. Another factor that may have helped home movers is the change to the Prudential Regulation Authority’s macro-prudential policy on loan-to-incomes. This allows lenders to more effectively manage the flow of loans at high income multiples and has coincided with the proportion of home mover loans at or above 4.5 loan-to-income ratio to overtake that of first-time buyers.
Chart 1: Proportion of loans at or above income multiple of 4.5
Source: UK Finance Regulated Mortgage Survey
On the remortgage side, competition amongst lenders, as well as near record low mortgage rates has meant more and more home-owners are remortgaging and locking in deals. If talk of the first rate rise in over 10 years continues to gain momentum, we would expect to see growth continue in this part of the market.
Growth in first-time buyers, home movers, and remortgage customers has meant total mortgage lending was estimated to have reached £21.4 billion in September, 5% higher than a year ago. Our data shows that of this lending, nearly two-thirds, or £13.7 billion, was carried out by High Street Banks. Stripping out seasonal factors, total mortgage lending is in line with monthly average lending since the start of 2017.
The level of credit card borrowing from High Street Banks, compared to a year earlier, is 5.5% higher. Annual growth across the whole market was stronger, at 7.8%, over the 12 months to September.
The total number of transactions in the credit card market increased by 5.6% in September, lower than the recent peak of 8.3% in April 2017. Contributing factors are a migration away from cash and the increased use and acceptance of contactless cards.
Despite this, the Visa Consumer Spending Index, which covers spending on credit and debit cards, showed a fall in spending in September relative to a year ago, after factors such as inflation, the migration away from cash, and the number of active cards are taken into account.
Chart 2: Growth in credit card lending, whole of market and High Street Banks
Source: UK Finance
Overdraft lending has fallen out of favour with customers over the last few years. Historically accounting for around 11% of unsecured lending by the High Street Banks, it now stands at just over 7% of unsecured balances outstanding and looks set to fall further.
According to respondents of the Bank of England’s Credit Conditions Survey (CCS), availability of unsecured credit is expected to fall towards the end of the year, with credit scoring for credit cards and other unsecured lending tightening further, continuing a trend seen over the past year.
Since the beginning of the year, non-financial companies’ deposits have grown relatively faster than the two years prior. One potential explanation is the uncertainty businesses face, as suggested by the latest Industrial Trends survey published by the CBI which pointed to uncertainty about demand as the factor most likely to limit capital expenditure by businesses. As a result, firms may prefer to increase deposits as a way of preparing for a potential slowdown in consumer spending over the near term.
Business borrowing has moderated over the course of 2017, with the growth rate of borrowing by wholesale and retail businesses slowing the most, as these customer-facing sectors by any cutbacks in consumer spending. This, along with data from the Credit Conditions Survey (CCS) shows that businesses are opting to borrow less, as overall availability of credit for businesses was reported to be unchanged in the three months to September, while lenders reported that demand for borrowing fell.
The depreciation in sterling has, as widely noted, weighed on average costs but it has also supported increased margins for export-orientated businesses. Survey data points to firms reporting export orders reaching their highest levels for over 20 years.