UK real money trends continued to improve in June, suggesting stronger economic performance in late 2012 / early 2013 – barring a major external shock.
The first chart shows six-month changes in seven real monetary aggregates (i.e. deflated by consumer prices, seasonally adjusted, not annualised). The changes are now positive for six of the seven measures, the exception being real M4, which continues to be depressed by a contraction of money holdings of economically-irrelevant “intermediate other financial corporations” (IOFCs). The generalised improvement partly reflects a slowdown in inflation but, in addition, nominal growth has risen in five of the six cases.
The second chart compares the two-quarter change in non-oil GDP with six-month changes in real broad and narrow money excluding volatile financial sector holdings (not just those of IOFCs). These measures contracted for much of 2011, thereby warning of recent economic weakness, allowing for the usual lag of about six months. June growth rates were the strongest since April and December 2009 respectively. This suggests that economic performance in late 2012 / 2013 will resemble that between mid-2009 and mid-2010, when non-oil GDP rose by an average 0.6% per quarter, or 2.3% annualised.
The monetary pick-up questions the necessity of the Bank’s additional stimulus measures since mid-year – these should further enhance economic prospects for 2013 but at the probable cost of creating “excess” liquidity that will distort asset prices and keep inflation elevated over the medium term.