Consensus gloom about UK economic prospects continues to be contradicted by solid real money expansion, promising a return to respectable growth in late 2012 and early 2013.
The preferred UK money measures here are non-financial M1 and M4, comprising holdings of households and private non-financial corporations (i.e. excluding volatile financial sector holdings). These rose by 0.7% and 0.6% respectively in August, lifting six-month increases to 3.0% and 2.6% (not annualised). Six-month growth is the fastest since January 2010 for M1 and May 2008 for M4 – see first chart.
Nominal money trends interact with inflation to determine economic prospects. Last year’s inflation spike resulted in a contraction of real money, reflected in economic weakness in late 2011 and early 2012 – second chart. Stronger nominal money expansion coupled with lower inflation have reversed the squeeze this year – real non-financial M1 and M4 (i.e. deflated by seasonally-adjusted consumer prices) rose by 1.9% and 1.5% respectively in the six months to August.
Current real money growth rates are similar to early 2009 ahead of a year of solid economic expansion – non-oil GDP rose by 3.0% in the five quarters from the second quarter of 2009 to the third quarter of 2010.
The consensus interpretation of today’s monetary statistics will be downbeat because of continued weakness of credit – non-financial M4 lending fell by 0.1% in August, for a six-month decline of 0.3%. An economic pick-up in late 2012 should demonstrate, once again, that money is a leading indicator while credit lags – but don’t expect the consensus to acknowledge its error or abandon “creditist” story-telling.