The flow of money and the UK real economy – Bank Underground

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Laura Achiro, Gerry Gunner and Neha Bora

A money flow structure A way to understand and track the movement of financial assets between different sectors of the economy. This blog specifically analyzes UK corporate and household sectoral flows from 2000 to the present and highlights how this framework can reveal useful trends and signals to policymakers about the real economy. For example, the accumulation of debt by households and corporates in the pre-Global Financial Crisis (GFC) era was a warning signal indicating a number of potential risks and vulnerabilities in the economy, including overleveraging and asset price inflation.

In our analysis, we look at fluctuations in surplus income or deficit positions for households and corporates. Fundamentally, each institutional sector runs an income surplus or deficit with each other in each period, depending on how much income and expenditure each sector has. These sector deficits require some form of financing, leading to the transfer of financial assets or liabilities. Net borrowing represents the overall surplus or deficit, and it is theoretically the same whether you look at it from an income or financial account perspective. Sector balance sheets track the amounts of assets and liabilities outstanding after all of these flows have occurred, although the quality of data can vary significantly across sectors.

We discuss key trends from 2000 to the present in an effort to understand the long-term flows of money in and out of the real economy. Throughout the blog, we argue that it is useful to have a money flow lens to provide the ‘macro’ context in which ‘macro-pr’ policy operates. In summary, in this blog we outline a brief case of how money flows can be an effective complement to the micro-data analysis that underpins the assessment of household and corporate risks. Recent Financial Stability Publications,

Growth of net debt position of households and corporates

The pre-GFC era was Strong growth and low inflation, which coincided with a large expansion of credit. We use financial accounts data in Charts 1 and 2 to show how UK corporates and households have substantially increased their debt burdens.

Households’ net position (Chart 1) declined from surplus in the early 2000s to a position where the net position was close to zero, driven by strong growth in borrowing from UK banks (marked by the aqua bars), Savings were partially offset by inflows. Banks, insurance and pension funds (shown by purple and green bars). The increase in debt levels led to an increase in the total household debt to income ratio (except student debt) between 2004 and 2008. While an increase in household credit can support economic growth through increased consumer spending, Its high level can increase the possibility of financial crisis, worsening the severity of the recession and reducing or blocking economic growth.

Meanwhile, UK corporates also increased their debt levels in the period before the GFC as they borrowed from banks (aqua bars in Chart 2) while taking advantage of increased access to capital markets where they issued bonds. Were (green bars in Chart 2). compared to houses, Corporates depended more on market-based finance and to a lesser extent on bank loans, And the borrowed funds were invested on a large scale Commercial real estate and balance sheet restructuring,

However, during the GFC period, credit conditions tightened banks withdrew loans, and resulted in both households and corporates becoming net lenders to the economy. moreover, house prices fell Significant reduction in the value of the collateral, and Families faced job loss Which made it difficult to maintain high debt levels. This decline in supply and demand of credit can be seen from the decline in credit to households and corporates from banks shown by the aqua bars shown in Charts 1 and 2. Corporates and households responded to economic uncertainty by adjusting their balance sheets. Cash deposits in banks, since 2009, are shown by the purple bars in Charts 1 and 2.

Chart 1: Household net borrowing from financial account (A)

Source: Office for National Statistics (ONS) and employee counts.
(a) The last data point is quarterly data collected through 2023 Q3.

In the post-crisis period, bank lending standards remained tight as seen from the low flow of bank credit to both households and corporates (aqua bars in Charts 1 and 2) from 2010 to 2013. Corporates continued to reduce borrowing, which reduced overall investment and credit growth in the immediate post-crisis period,

However, as the disruptive effects of the crisis subsided from 2013 until the onset of the pandemic in 2019/20, corporates increased borrowing through capital markets as well as bank lending (aqua and green bars in Chart 2).

Chart 2: Corporate net borrowing from financial account (A)

Source: ONS and staff counts.
(a) The last data point is quarterly data collected through 2023 Q3.

In 2020, the world was grappling with a different kind of crisis, which had an economic impact on households and corporates

Charts 1 and 2 provide evidence of how the change in financial imbalances following the COVID pandemic was in sharp contrast to the effects of the financial crisis. concerned about Commercial bank viability during the GFC led to a contraction in credit availability Which had a negative impact on the real economy. On the other hand, demand initially declined due to lockdown restrictions and economic uncertainty due to the pandemic. Both households and corporates accumulated savings, leading to an overall increase in deposits in UK banks, with household and corporate deposit accumulation (violet bars in Charts 1 and 2) peaking in 2020.

The pandemic caused the household net debt position to rise to a historic high of almost £180 billion (Chart 1). Meanwhile, corporates especially reduced their debt levels Corporate bond issuance (green bars) As Parts of financial markets closed to risky borrowers sometime in 2022 Reflecting additional caution by investors (Chart 2). Most large corporates refrained from substantially increasing their debt levels, although small and medium enterprises still took loans at the favorable terms offered by government-backed schemes, as seen by the aqua bars in Chart 2, mainly For precautionary purposes. Precautionary borrowing from corporates saw liquidity improve as they built up cash buffers with UK banks (violet bars in Chart 2).

And after the pandemic, deposits have opened up

more recently, Prices of essential commodities have increased Faster than household income, and more To afford the rising cost of living, households have been driven to save less and use their pandemic savings and debt-service costs. in homes too their debt accumulation reduced, particularly in the case of mortgages, as seen by the shrinking aqua bars in Chart 1 that represent loans from UK banks. Overall, both of these pressures on households have reduced deposit flows into UK banks.

Corporates also responded to higher interest rates by repaying debt (green and aqua bars), increasing their net debt position (Chart 2). Deleveraging reduced the gross debt-to-income ratio of corporates to 275% in Q3 2023, down from its pandemic peak of 345% in Q4 2020. Although the overall health of UK corporates has improved, there remains a tail of highly leveraged corporates, These highly leveraged corporates are associated with a greater likelihood of distress and refinancing difficulties. Like households, corporates are also showing a decline in deposit levels with UK banks in recent data (violet lines in Chart 2).

Epilogue

This blog highlights how the money flow framework can help policymakers understand broader macroeconomic developments affecting households and corporates. Using a flow of funds framework, our narrative highlights several trends in the borrowing behavior of households and corporates over different time periods. For example, we see certain trends for both households and corporates, such that, in the pre-GFC era, we saw credit expansion across the household and corporate sectors, which ultimately contributed to the resilience of the real economy during and after the GFC crisis. reduced. More recently, during and following the Covid pandemic, households and corporates experienced changes in their debt levels due to government stimulus measures such as increased unemployment benefits for households and government-backed loans for corporates. As economic conditions improved immediately after the pandemic, some corporates began deleveraging, while households reduced their debt levels. Understanding these flows from the financial account is important to assess the subsequent accumulation of assets and liabilities in the real economy as it helps policy makers set the ‘macro’ context. Therefore, in this blog we argue that money flows are an effective complement to the micro-data analysis that underpins our assessments of household and corporate risks. Recent Financial Stability Publications,


Laura Achiro and Neha Bora work in the Bank’s Macro-Financial Risk Division and Gerry Gunner works in the Bank’s International Surveillance Division.

If you would like to get in touch, please email us at bankunderground@bankofengland.co.uk or leave a comment below,

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