24th August 2016

Borrowing continues as usual despite Brexit uncertainty

Written by Rebecca Harding, Chief Economist

This month’s BBA High Street Banking statistics are the first to be published that reflect the immediate period since the UK referendum. The data does not suggest that borrowing patterns have been unduly affected by the Brexit vote. Net mortgage borrowing and consumer credit annual growth are identical to the figures in June at 3% and 6% respectively. Business borrowing has picked up since its mild contraction in June across all sectors, and household and business cash deposits continue to grow at a similar rate, to the last two months.

No-one should be surprised at these results. It is impossible to conclude much from one month of data, not least because the borrowing process, whether for households or businesses, takes time to work through from decision to borrow to the point where the transaction is closed. It is likely, therefore, that we will not see any major impact for at least a few months to come.

As a nation we are still spending for short-term goods and services using our credit cards. Consumer credit, for example, has been growing considerably faster at an annualised rate of 6% than real earnings growth (at an annualised rate of 2.4%)for some months now. This arguably underpinned the growth in retail sales that we saw in July and, as Figure 1 suggests, year-on-year growth in consumer credit appears reasonably correlated with year-on-year growth in retail sales.

Figure 1 Credit card transactions volumes vs retail sales volumes, % change on year

Source: BBA

Business borrowing is not following the same pattern as business confidence. Our data show a clear upward trend in business borrowing for the last few months, making the small downward tick in June look like a blip rather than a pattern at this stage. The weak Manufacturing Purchasing Manager Index results are not borne out by our data at this stage (Figure 2). The drop in borrowing in June could simply have been a short-term nervousness, as witnessed by the substantial drop in the PMI after the referendum.

Figure 2:Bank Lending, Manufacturing vs Manufacturing PMI

Source: BBA, Markit

Finally, it is the housing market that may be giving us a clearer picture of trends. Net mortgage lending continued to rise annually at 3% in July. This figure is identical to the annual increase in June. However, mortgage approvals for house purchases were 19% lower  in July than a year earlier. The overall numbers of these approvals were higher in the first seven months of the year compared to where they were a year before, but the trend between January and July 2016 was downwards, while in the same period in 2015 it was upwards.

Annualised house prices grew at 8.7% in July although interestingly, month on month the value of loans is just 1% higher than it was a year ago. This indicates that the pressures in the housing market at the moment are actually quite weak.

Figure 3: Change in average value of loans for house purchases vs change in house prices

Source: BBA

All of this suggests that, for the UK borrower, whether commercial or household, it is business as usual for the time being. There is no panic exodus or lock down in borrowing but, as many of the decisions to borrow could well have been made before the Brexit vote, we really should look for longer term trends before we can draw any conclusions.

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