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UK money trends: continued weakness

Posted on Thursday, January 31, 2019 at 10:41AM by Registered CommenterSimon Ward | CommentsPost a Comment

UK money trends, while not deteriorating further, continue to suggest a weak economic outlook. GDP growth may fall below 1% this year even if a no-deal Brexit is avoided.

Six-month growth rates of real narrow and broad money (non-financial M1 / M4) were little changed in December and remain low by historical and international standards – see first chart.

Real money growth, as in Euroland, has been supported by a fall in inflation. In addition, Brexit and other risks may have boosted the precautionary demand for money, in which case current money growth rates may overstate near-term prospects for spending on goods and services.

Consistent with the latter story, retail investors sold mutual funds in the fourth quarter of 2018 for the first time since the EU referendum quarter in 2016 (and on a larger scale than then)*. Bank of England commentary, meanwhile, notes an above-average rise in household M4 holdings in December, driven by deposits in interest-bearing instant access savings accounts. A savings measure combining M4 holdings, mutual funds, National Savings and foreign currency deposits (“non-financial M4++”) is growing more weakly than the money aggregates – second chart.

Broad money trends have been supported from the credit side by steady expansion of bank and building society lending to the private sector. The latest Bank of England credit conditions survey, however, suggests a coming lending slowdown – third chart.

The OECD’s UK composite leading indicator continues to give a gloomy message for economic prospects, falling further in December – fourth chart**. The indicator is designed to predict the direction of GDP relative to trend, i.e. a decline signals below-trend growth, with trend currently estimated at 2.0% per annum. Four of the six components exerted a negative influence in December – consumer confidence, local share prices, expected services demand and interest rates***.

The above developments argue for the Monetary Policy Committee to shift to an easing bias at its upcoming meeting, although such a move appears unlikely.

*Source: Investment Association.
**Estimate based on data for five of six components. OECD data released on 11 February.
 ***The other components are car sales and expected manufacturing output.

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