British Pound Falls Hard as Bank of England Lending Data Points to a Jaded Consumer

Pound Sterling is under pressure as the latest data out of the Bank of England weighs on sentiment.

Normally markets wouldn’t take much notice of Bank of England lending data, but it appears they might have been spooked by today’s figures.

Bank of England consumer credit supply grew by £1.039BN in December, well below the £1.7BN forecast by economists suggesting a waning appetite for credit.

Is the British consumer - the mainstay of the UK economic growth story - finally getting a little weary?

Markets appear to be betting so.

"Sterling fell hard in morning London dealing today after a series of UK credit reports missed their mark. The pair was down nearly 100 points off its highs dropping to a low of 1.2412 before finding a modicum of support," says Boris Schlossberg, Director at BK Asset Management.

Indeed, the lending data corroborates the soft retail sales data we saw released earlier in the month which came in well below analyst expectations.

Retail spending in December was not as high as economists had expected and some had suggested this is because much of Christmas shopping is now carried out the October-November sales period. 

Indeed, German retail sales data for the same period appears to corroborate this and suggests this could be a global phenomena.

Nevertheless, markets believe that UK consumer activity is slowing, and therefore so will the economy in 2017.

That said, it is not all bad as there are indications that December’s slowdown in consumer activity might be temporary.

The latest YouGov/Cebr Consumer Confidence Index rose 2 points to 110.3 in January, its biggest increase since August and its highest level since September.

The improvement reflected a better outlook for house prices, businesses and household finances, YouGov and Cebr said.

The impact on the Pound of the Bank of England data is notable:

• The Pound to Euro exchange rate is trading at 1.1604
• The Pound to Dollar exchange rate is trading at 1.2432
• The Pound to Australian Dollar exchange rate is trading at 1.6458

It is worth pointing out that the brunt of pressure suffered by GBP/EUR is likely as a result of the strong data releases from the Eurozone this morning.

We saw inflation, GDP and employment rise in the Eurozone at a rate that analysts were not expecting.

But this Could Actually be a Good Thing

The reliance of the UK on consumer credit has been a long-standing concern for many economists.

Indeed, if 2008 reminded us of anything it is that too much debt typically ends in tears.

The Bank of England’s Martin Taylor recently flagged concern about the pace of consumer credit growth suggesting it was a flashing light that required closer examination.

“We expect some moderation in household borrowing growth. While the slowdown in consumer credit growth will have been welcomed by policy makers, the ratio of unsecured debt to disposable income has still risen significantly recently,” says Scott Bowman, UK Economist at Capital Economics in London.

Bowman believes the recent slowdown in employment growth and lingering uncertainty about the economic outlook is likely to put the brakes on growth in household borrowing.

That said, with households remaining upbeat about their own personal financial position, and interest rates at historical lows, Capital Economics don’t think that household borrowing growth will experience too sharp a slowdown.