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April 18, 2017

The State of Credit Markets in the UK and the US

In Q1 2017, the United Kingdom witnessed the first tightening of consumer credit in 6 years. This is an especially troubling sign, given the Brexit reality that has befallen Britons since the historic Brexit referendum on June 23, 2016. That the GBP/USD pair plunged to a 31-year low shortly afterwards is testament to the inherent volatility in the financial markets. The Bank of England (BOE) has been cautiously eyeing proceedings, offering a steadying hand wherever needed to guide the UK economy through these troubled times.

It was somewhat surprising to myself and other financial analysts that the UK weathered the infancy stages of the Brexit storm so well. That the GBP/USD pair is currently short-term bullish is particularly encouraging, given the grim reality of the complex extrication process ahead for the UK. Nonetheless, UK consumers were not deterred by plans to divorce from the European Union, and they continued to spend throughout Q3 and Q4 2016. The problem is that the lag effect has finally caught up with folks in the UK, and Brexit realities are coming home to roost.

BOE Cautions of Rising Consumer Borrowing in the UK

Multinational conglomerates have made no bones about their desire to repatriate jobs and headquarters to other cities in Europe such as Frankfurt, Paris, Milan and elsewhere. The loss of European passporting rights that is possible if multinational banks and financial institutions remain in the City of London is simply too great to bear. Meanwhile, Britons were supporting an inflated UK economy post-Brexit referendum by continuing to borrow money from banks and other lenders.
This gave the impression of a thriving economy, but the recent contraction, as reported by the BOE is now troubling. Indeed, BOE governor, Mark Carney once said that rising consumer borrowing is more troubling to the United Kingdom than the Brexit itself. The BOE has been hard at work stabilizing monetary policy to facilitate the smooth passage of the Brexit. Nonetheless, consumers are having none of it and spending remains above forecasts. Retail banks have not wasted any time and are now tightening all the criteria and conditions placed on consumer credit. This includes credit cards and unsecured personal loans.

UK and US Credit Markets Remain Favourable to Consumers

As a financial consultant, I always recommend that you monitor your credit to ensure that you are getting the best deal on the market. UK interest rates may be favourable to credit expansion, at 0.25% but credit defaults are growing. The BOE governor, Mark Carney will be giving a speech on Thursday, 20 April 2017, but for now it appears that the bank rate will remain at its historical low and that the BOE will continue its accommodative monetary policy with asset purchases of £435 billion. This monetary accommodation means that the cost of credit in the UK will likely remain cheap in the near future, but it says nothing about defaults or banks inclinations to make their lending criteria more stringent.

In the US, there are some deeply troubling signs taking root and these are related to huge retail operations and possible credit defaults. It comes as no surprise that e-commerce is driving retail activity in Western countries. However, this puts traditional retailers at a distinct disadvantage, particularly those with hundreds of outlets across the country. Three particular brands are facing tremendous pressure in the form of J.C. Penney, Sears, and Macy’s. Online shopping has decimated their bricks and mortar operations, yet these companies have been borrowing hand over fist to try and maintain retail operations. This is creating another potential crash the likes of which we lost witnessed in 2008. If companies like Macy’s, Sears, and J.C. Penney appear to be folding, we’re going to see various hedge funds coming into play betting against these firms.

US Retail Loan Delinquencies Fuel Hedge Fund Speculation on Next Credit Bubble

Already we saw $5.3 billion of commercial mortgage-backed securities in February 2017 – that’s up 50% year-on-year. Retailers are failing across the board, and this is evident in the price of Target Corporation, Costco, and others. Many malls across America are going to feel the credit crunch as a result of decreased foot traffic through their stores. While this may not be anywhere near as big as the mortgage-backed securities markets, we are still talking a major downward revision in US retail and these companies will like default on their outstanding loans. This will invariably cause the shuttering of malls across the US. This type of ‘negative credit sentiment’ is being punted by major banks like Morgan Stanley and Deutsche Bank, as retail loan delinquencies continue rising.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Item Reviewed: The State of Credit Markets in the UK and the US Rating: 5 Reviewed By: EconMatters