Ever decreasing circles…

Back from holiday, and before for further ado it is worthwhile noting a number of the usual suspects:

Declines in M4 lending continue in the UK – M4 lending ex securitisations and intermediate OFCs declined by 2.1bn or -0.1% in November. With high levels of debt, current and expected continuing deleveraging, weak to negative broad money supply growth is not unexpected. However the margin of decline needs to be set against the much higher consumer price inflation rate meaning that real money supply growth is falling at a much faster rate. This is on the back of recently reported weak Eurozone money supply growth. As long as we have deleveraging we will have weakness in the core financial system and for those highly indebted sovereigns, continued stress in raising debt and maintaining credit ratings etc.

There were weak retail sales in Novemberin the Euro area, down 0.8% on October and by 2.5% on the year before. Negative fourth quarter growth in GDP was also provisionally reported in Germany.

The US economy continued to show resilience through to November, but supported through imbalances in the wrong areas: low savings rates, weak growth in personal disposable income, increased consumer borrowing, increasing US government indebtedness and high inventory levels. US consumption still represents too high a component of GDP and debt deleveraging is likely to recommence at some point in the near future.

According to the November report of personal incomes and outlays by the BEA, real personal disposable income has fallen by 0.35% (per capita has fallen by 0.81%) since April (nominal it has risen by 0.4%) with savings rates have fallen to 3.5% in November from 4.8% in April. All this while consumer credit has risen by over 3% over the last year.

While consumer credit growth of 3.1% year on year is on the low side historically, it is significant when set against high debt levels, high unemployment and when set against low GDP growth and low savings rates.

But let us look at the overall picture using formal data to the third quarter from the Federal Z1 accounts extended to November re the recent BEA data and Federal Reserve consumer credit data:

The following chart shows the quarterly changes in (Millions) personal disposable income, consumer credit and the reduction in personal savings relative to the savings rate in the second quarter of 2009 set against the quarterly change in personal outlays. It shows in particular the importance of the reduction in savings and increase in consumer credit to economic activity from the second quarter onwards in particular.

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Looked at another way:

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The above shows the marginal expenditure power of the three different options – disposable income increases, DPI + savings reduction, and DPI + credit increases + reduction in savings. This can of course go the other way as we saw at the start of the period.

Finally, government transfer receipts typically made up some 14% of gross household and non profit personal income prior to the crisis, but this increased to some 18% since then. If we look at the relative importance of this factor relative to the above we have idea of the potential impact of fiscal austerity on US final demand.

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Central banks and governments continue to prop up the both the financial system (increasingly so) and the economy in the US and Europe in particular. We should not forget that the only reason the financial system remains operational is because of this support, and support will likely remain in place for some time yet.

The Bank of England’s balance sheet (assets) has expanded since the onset of the crisis, while UK banks domestic assets have fallen: source data for the following charts is taken from the B of E statistical database.

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And UK banks sterling assets, holdings of government securities and advances to UK residents from January 2010…

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