UK household credit impulse drops to near two-year low

UK household credit impulse drops to near two-year low

Macro 4 minutes to read
Christopher Dembik

Head of Macro Analysis

Summary:  The UK household credit impulse reading is one of the weakest among the developed market countries, and we see four major factors weighing on the negative trend in household consumption.

UK credit impulse has been one of the lowest in DM countries, but recently returned to positive territory at 1.3% of GDP
Household credit impulse still showing important signs of weakness
Consumer spending, which accounts for about 60% of the UK’s economy, is at-risk to slow if political uncertainty continues

The UK credit impulse, which is a broad measure of new credit from the private sector based on BIS data, has been one of the weakest in DM countries, reaching a lowest post-crisis point at -7.7% of GDP at the end of 2017. The magnitude of the drop was almost similar to that of the 1992 recession. Unlike in the early 1990s, however, credit impulse has quickly returned to positive territory, and is now running at 1.3% of GDP. The rise in new credit, however, can mostly be explained by seasonal factors and underlying credit growth seems to be edging down. Annual outstanding credit to the private sector is slowly decelerating after reaching a year-on-year average level of 5.1% over the 2016-18 period. 

Digging into the data, the UK credit impulse is negatively impacted by a contraction in new household credit. Our measure of new household credit, covering both housing and personal loans, is near a two-year low. Based on our most up-to-date data, the flow in new lending secured on dwellings, which serves as a proxy for new housing credit, is running at -0.9% of GDP while the flow in new personal loans is even lower, at -1.4% of GDP. Such a level hasn’t been reached since June 2013. Negative trend in household credit is expected to continue, due to Brexit uncertainty and worrying macroeconomic signals. We see four major macroeconomic and financial risks that will weight on household consumption this year.
Credit impulse
Falling consumer confidence is weighing on the economy

If we agree on the assumption that the UK economy’s fate is held in the hands of the consumer (as consumer spending represents about 60% of the economy), the last GfK survey leaves little room for optimism. Consumer confidence is at its lowest level for five years and there is no hope of an imminent reversal. The general economic situation over the next 12 months is at -38 (the lowest point since 2012) and personal financial situation over the next 12 months is at -1 (the lowest point since July 2016).

The UK's gloomy consumer mood has already had an impact on some market segments such as the car industry. New car registrations, which are viewed as a leading indicator of the wider economy, went from 2.7 million to 2.3 million over the past 20 months – a 15% drop.
Credit impulse
Negative wealth effect due to lower house prices

Due to Brexit uncertainty, house prices have moved down over the past quarters. The trend is very negative in the prime London residential market, which has been in contraction since July 2017, but it is also worrying in the rest of the country. Based on nationwide data, overall residential real estate prices continue to slow, at 0.5% y/y in December 2018, the lowest level since early 2013.

As one-third of UK wealth household results from housing, negative wealth effect linked to weakness in home prices will also affect household confidence and consumption. We don’t expect any future improvements here, which means that the cooling in real estate will constitute another major challenge for the UK economy. 
Credit impulse
Credit conditions are mixed

Credit conditions over the past three months covering Q4 2018 were poorer than they have been since mid-2014. Answering the question, “how has the availability of secured credit provided to households changed?”, lenders mostly confirmed a deterioration of the terms and conditions on which credit were provided.

The net percentage balance was out at -12.1. In contrast, for the next three months covering Q1 2019, lenders are more optimistic which can be at least partially explained by expectations that wage growth will continue to rise faster. However, underlying credit conditions are still rather unfavourable due to political uncertainty and the risk that the Bank of England might raise interest rates as soon as a window of opportunity occurs (probably in case of a soft Brexit) to counter inflationary pressures, notably in services. 
Credit impulse
Household financial stress is rising

In the years after the referendum, the UK households that were already heavily indebted (debt-to-income ratio is 60% higher than that of the end of the 1980s, at 133%), tapped into their savings to maintain their standard of living. IAs such, that y/y household consumption expenditures remained at a high level until mid-2017, above 2.5%.

The impact of the Brexit referendum is very noticeable: the savings rate fell sharply in just a few quarters, from over 7% to an historical low point of 3.3%. It remains close to that level, at 4.3%. In the event of a prolonged economic slowdown or a more severe economic crisis, high household financial stress will prevent the UK economy from relying on household spending to cope with headwinds, ultimately accentuating the crisis. 
Credit impulse
In sum, no matter what trade conditions prevail between the UK and the EU, t2019 will certainly mark the start of a new cycle of lower growth, higher financial risk and deteriorating household consumption. We can already draw an economic lesson from Brexit: any country that wants to follow the UK’s path will find the process much more complicated and economically costly than anyone thought. 

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.