Strong July purchasing managers’ surveys across manufacturing, construction and services support the long-standing expectation here that the UK economy will grow by about 2% in 2013. Forecasters are scrambling to upgrade their predictions but the consensus currently remains well below this level.

Annual average growth of about 2% may be achieved by a combination of upward revisions to current first- and second-quarter estimates and continued solid expansion during the second half, resulting in an increase of about 3% in GDP between the fourth quarters of 2012 and 2013. The four-quarter GDP rise has surged well past 3% when surveys have shown similar strength historically.

This year’s economic pick-up was signalled by increases in annual real (i.e. inflation-adjusted) broad money growth and share prices during 2012. As discussed in a previous research note, joint increases in real money expansion and the stock market usually presage a solid GDP rise in the subsequent calendar year. Falls in both indicators, by contrast, have warned of economic weakness – such a signal was given at end-2011, correctly anticipating poor performance in 2012.

The positive message for 2013 from this simple forecasting rule-of-thumb was reinforced by a strong pick-up in real narrow money around year-end 2012. Narrow money – i.e. M1, comprising sterling notes and coin and instant-access deposits – is accorded significant weight here as an indicator of short-term spending prospects, since consumers and firms usually accumulate such cash holdings before increasing outlays. Six-month growth in real non-financial M1 reached 10.1% annualised in April – the fastest since 2004.

The brightening of economic prospects in late 2012 / early 2013 was missed by an economics consensus that continues to pay little attention to monetary indicators. The average forecast for calendar GDP growth, indeed, was cut further in early 2013 as “triple-dip” hysteria – unsupported by any evidence – took hold. The supposedly-independent Office for Budget Responsibility chased the consensus lower, predicting a 2013 GDP rise of just 0.6% in its March Budget update.

Monetary trends lead the economy by about six months and remained solid in June, suggesting continued robust economic expansion through end-2013 – see previous post.

Current and prospective economic strength argues against the MPC entering a commitment to maintain rock-bottom official interest rates, particularly given evidence that firms are raising prices in response to better-than-expected demand – the PMI services output price index rose to its highest level for more than two years last month. Such a commitment, indeed, could be counterproductive if consumers and businesses think that loose policy in the immediate future will need to be offset by larger rate rises further out – worries about consequent economic weakness could hold back spending now.

An MPC responding to incoming data in the same way as in the past would now be shifting to a mild tightening bias, according to the “MPC-ometer”  model followed here – a statistical representation of the Committee’s “reaction function” since its inception in 1997. The model turned positive, suggesting a hawkish majority, in August – the last positive reading was in August 2011. Bank of England Governor Mark Carney may succeed in delivering a new dovish commitment this week but latent opposition from other MPC members could come back to bite him.