Lending data offers little new insight on household finances – EY ITEM Club comments

• July's Money & Credit data provided mixed news on the state of UK household finances, with deposits up but lending flows down. Overall, households saving less and borrowing more are expected to offer some offset to the impact of falling real incomes. But consumer spending growth is still on course for a significant slowdown.
• Despite a modest increase in mortgage approvals in July, the broader trend is one of a steady decline in housing activity. The EY ITEM Club still thinks a soft landing for property prices is the most likely outcome, but the risk of a more substantial correction for the housing market is increasing.

Martin Beck, chief economic advisor to the EY ITEM Club, says: “The Bank of England’s Money & Credit release for July could not provide a clear steer on the state of household finances. Households added £4.3bn to their stock of bank deposits. This was a higher figure than in June but was a little below the average of the five years before the pandemic. While reading through the monthly volatility, deposit growth still appears to be on a steady downward trend, reflecting the intensifying squeeze on household spending power.

“Net unsecured lending cooled to £1.2bn in July, from £1.5bn in June. But gross lending picked up from June's three-month low, with higher repayments weighing on the net figure. With little in the way of new information in the July data, the EY ITEM Club continues to think that households saving less and borrowing more could provide some offset to the impact of falling real incomes. But with the pressure on household finances set to intensify through the winter, consumer spending growth is on course for a notable slowdown.

“Though mortgage approvals increased between June and July, the bigger picture is one of a steady decline in housing activity. Approvals of 63,770 in July were well below the monthly average over the year-to-date of 67,381. Demand is coming under increasing pressure from a combination of stretched affordability, rising interest rates and falling real incomes. And with the latter two factors expected to deteriorate further over the next few months, activity is likely to continue to soften. The EY ITEM Club still thinks a soft landing in house prices is more likely than a sizeable correction. However, the intensifying squeeze on household incomes, deteriorating growth outlook, and prospect of a higher peak for interest rates have increased the risk of a hard landing scenario playing out.”