While U.K. financial conditions remain broadly favourable to growth, recent data show softening demand for funding from both businesses and households.
“This supports our view that the U.K. economy is set to slow gradually over this year,” said S&P Global Ratings Senior Economist Boris Glass, in the report published today, “Softening U.K. Credit Demand Points To An Economy That Is Gradually Losing Momentum.”
While corporate financing costs have continued to edge even lower, thanks to an ultra-accommodative monetary policy, demand appears to have started to slip somewhat following the Brexit referendum, according to the BoE’s Credit Conditions Survey for the fourth quarter of 2016.
A striking feature of lending in recent years is the strong increase in consumer credit, with year-on-year growth exceeding 10% since May 2016 (10.3% still in January).
Yet, the annual growth numbers hide some interesting detail. Looking at the recent monthly flows, net consumer credit actually slowed recently – notably in December and January – where seasonally adjusted unsecured lending to
households was, at £1 billion and £1.4 billion, significantly lower than the £1.6 billion average in the 11 months to November 2016. In our view, this is a sign that the consumer spending spree that almost entirely drove GDP growth in 2016 is likely to have started cooling.
It is further supported by a decrease in retail sales volumes, with the January three-month rolling average declining for the first time since 2013.
Overall, S&P thinks credit supply conditions remain relatively favourable and are supporting the economy, in particular, thanks to the BoE’s continued very accommodative stance. However, these favourable conditions will not be able to completely offset the expected adverse impact of pronounced Brexit-related uncertainty and the inflation squeeze on household budgets in particular.
“U.K. demand for funding from both businesses and households has been softening somewhat at the beginning of this year, which the rating agency believes is the first sign of the gradual slowing of the economy that expects for 2017,” said Mr Glass.
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