UK corporate money growth has rebounded, suggesting a pick-up in business investment, which Bank of England Governor Mark Carney has cited as a condition for a rise in interest rates. The money numbers, indeed, may have contributed to the change of tone in Governor Carney’s latest speech: the Bank’s suite of forecasting models includes an investment relationship with corporate money and lending.

The overall monetary backdrop remains weak, with a slowdown in household money offsetting faster corporate expansion, and higher inflation squeezing real money balances. Soft consumer spending, therefore, still appears likely to drag down GDP growth despite a possible near-term investment recovery.

The first chart shows annual growth rates of nominal GDP and narrow / broad money, as measured by non-financial M1 / M4. The non-financial aggregates cover money holdings of households and private non-financial corporations (PNFCs), omitting financial sector deposits, which are volatile and largely unrelated to economic activity. Annual non-financial M1 growth peaked at 10.1% in September 2016 and fell further to 7.7% in May. Non-financial M4 growth has declined from 6.8% to 5.0% over the same period.


Turning points in annual non-financial M1 growth have consistently led those in nominal GDP growth in recent years. The latter may have peaked in the fourth quarter of 2016 and is likely to move lower during the second half of 2017.

The second chart shows the recent divergence of household and corporate (PNFC) money growth. Annual growth of PNFC M4 has risen from a low of 3.8% in November 2016 to 9.3% in May, a 14-month high. PNFC M1 growth has also rebounded.


Annual household M4 growth, by contrast, has dropped from 6.8% to 3.8% since September 2016. M1 growth has fallen by more.

Economic activity prospects are related more closely to real than nominal monetary trends. The third chart shows two-quarter / six-month changes in GDP and non-financial M1 deflated by consumer prices (seasonally adjusted), along with the household / corporate breakdown of the latter. (Narrow money outperforms broad money for forecasting purposes.) Real non-financial M1 growth has fallen significantly but stabilised in May and remains comfortably above zero, consistent with weak GDP expansion rather than stagnation or contraction.


Two additional considerations caution against gloom. First, corporate real money growth often leads the aggregate measure, suggesting a recovery in the latter. Secondly, the real money slowdown has been driven roughly equally by a fall in nominal money growth and a rise in inflation – consumer prices surged at an annualised rate of 3.8% in the six months to May. Annual inflation is likely to increase further but the six-month rate of change of prices may slow during the second half, supporting real money expansion.