The UK 2008-09 recession may no longer warrant the label “great”. GDP is now estimated to have declined by 6.0% over five quarters in 2008-09 versus 7.2% over six quarters previously. The Office for National Statistics (ONS) has repeatedly claimed that the 2008-09 recession was the deepest in post-war history. This remains true – just – on the revised data: the 6.0% drop compares with a 5.9% reduction in the 1979-82 recession.
A comparison of the two recessions, however, should take account of North Sea oil and gas production, which rose in 1979-82 but fell in 2008-09, for reasons unrelated to the economic cycle. Excluding such production, the decline in output was marginally larger in 1979-82, i.e. 6.3% versus an estimated 6.2% in 2008-09 – see chart*.
Non-North Sea output, moreover, has risen by significantly more than overall GDP since the recession trough – an estimated 10.5% versus 9.3%. Output is still lower, relative to the pre-recession peak, than at the equivalent point in the 1980s but the shortfall is modest – an estimated 2.1% – and could easily disappear in future ONS revisions.
The new data suggest that non-North Sea output began falling in the third quarter of 2008, one quarter later than overall GDP, i.e. the onshore recession lasted four rather than five quarters. The later entry fits better with monetary developments: real narrow money started to contract in early 2008 and typically leads activity by about six months.
*Non-North Sea output is measured by gross value added (GVA) excluding oil and gas. GVA equals GDP minus the difference between taxes on production and subsidies. GVA ex oil and gas for 2007 Q1 to 2014 Q2 was estimated from the GDP revisions and previously published data.
Global economic growth should firm further near-term but is likely to moderate again in late 2014 / early 2015, judging from July money supply data.
The forecasting approach here focuses on the six-month rate of change of global real narrow money*. This fell significantly between May and November 2013, correctly signalling that economic momentum would slow in the first half of 2014, allowing for the usual half-year lead. Global six-month industrial output expansion appears to have bottomed in June, based on partial July data – see first chart.
The six-month real narrow money change fully recovered its 2013 fall in early 2014, suggesting a rebound in economic growth into the autumn. It has, however, drifted lower more recently, though remains well above the November 2013 low. Economic news, therefore, may surprise positively near term before turning mixed in late 2014. (The longer leading indicator followed here is expected to confirm this assessment – a July reading will be available on Monday 8 September.)
The country detail is interesting. In developed markets, the six-month real money change has been strongest in the US and weakest in Japan, consistent with recent economic performance – second chart. This gap should narrow: US strength is fading and the Japanese reading will rebound as the April sales tax rise drops out of the six-month calculation. Eurozone real money growth, meanwhile, is firming, suggesting improving prospects. A recent sharp slowdown in Canada may signal coming economic weakness.
In emerging markets, real narrow money trends are positive in Mexico, China and Korea** but negative in Russia and, particularly, Brazil – third chart. The Mexican / Brazilian divergence has been reflected in economic performance, with GDP rising by 1.5% and falling by 0.7% respectively between the fourth quarter of 2013 and the second quarter of 2014. Indian narrow money is growing strongly in nominal terms but a rebound in inflation has held back real growth.
*Global = G7 plus emerging E7. Real = deflated by consumer prices. Narrow money = currency plus demand deposits (or nearest available measure).
**Korea latest = June.
UK narrow money growth slowed in July while broad money growth was little changed: monetary trends, overall, appear consistent with continued solid economic expansion through early 2015.
The preferred narrow and broad aggregates here are M1 and M4 excluding financial sector deposits, which are volatile and contain less information about near-term economic prospects. Six-month growth of real non-financial M1 fell to 3.3% (not annualised) in July, the lowest since March 2013 but still strong by historical standards. Six-month real non-financial M4 expansion was 1.4%, equal to its average over the past year – see first chart.
The decline in narrow money growth in July reflected a large movement of funds out of household sight deposits into cash ISAs to take advantage of an increased annual investment allowance of £15,000. These funds would normally have been invested over April-June, suggesting that M1 expansion was inflated in these months, i.e. the July reading represents a return to trend.
The “big picture” is that real narrow money growth rose substantially in 2011-13 ahead of 2013-14 economic strength and remains at an expansionary level despite recent moderation. Stable real broad money growth supports the view that there has been no material change in the monetary environment.
The August MPC minutes cited solid expansion of corporate broad money holdings as a reason for optimism about business investment. This was sustained in July, with a six-month increase in real M4 held by private non-financial corporations (PNFCs) of 3.4% – second chart.
Banks are continuing to widen their interest margin on household sector business, according to interest rate data released with the monetary statistics. The average rate paid on household deposits fell by a further 2 basis points to 1.14%, while the average lending rate was unchanged at 3.93%*. The lending / deposit rate spread, therefore, rose to 2.79%, the highest since August 2010 – third chart.
*Lending / deposit rates on outstanding stocks estimated from interest rate / volume data for different types of business.
The “monetarist” rule-of-thumb that money supply changes lead domestic prices by roughly two years suggested that Eurozone and UK “core” inflation would bottom around end-2013 and revive during 2014. Recent news is consistent with this forecast, although the rise to date has been small.
Eurozone core inflation, as measured by the annual rate of change of consumer prices excluding energy, food, alcohol and tobacco, fell from 1.5% at end-2012 to 0.7% at end-2013. It revisited this level in March and June but edged up to 0.9% in August, according to today’s “flash” estimate – see first chart.
UK core inflation declined from 2.4% at end-2012 to a low of 1.6% in January 2014 but was 1.8% as of July – second chart.
The change of trend around end-2013 fits with a turnaround in monetary growth in 2011-12. Annual narrow money expansion bottomed in July 2011 in the Eurozone and June 2011 in the UK but a significant recovery was delayed until 2012.
Core inflation has been temporarily restrained by exchange rate strength. The euro effective rate rose by 6.5% during 2013, though has fallen by 3.4% year-to-date. The sterling effective rate climbed 1.7% last year and is up a further 3.0% so far in 2014.
UK core inflation is expected here to rise significantly by mid-2015, reflecting a strong increase in money growth through mid-2013 and subsequent economic buoyancy. Services inflation should lead the upward move: the net percentage of consumer services firms planning to raise prices is the highest since 2011, while pay pressures are increasing – third and fourth charts.
Eurozone monetary trends strengthened further in July, suggesting that recent ECB policy easing is bearing fruit and will lead to an economic revival later in 2014, barring external “shocks”.
Six-month growth of real (i.e. inflation-adjusted) narrow money M1 has risen from 1.6% (not annualised) in April to 2.5% in July, a solid pace by historical standards. Real M3 expansion has recovered from 0.1% to 1.1% over the same period, the latter reading being the highest since late 2012, ahead of a return to economic growth in 2013 – see first chart.
Nominal money trends have firmed notably in the latest three months, partly reflecting the ECB’s June rate cut and the announcement effect of its targeted long-term refinancing operations (TLTROs), the first of which will be allotted on 18 September. M1 and M3 rose at annualised rates of 7.3% and 5.7% respectively between April and July.
Faster M3 growth has been driven by a further rise in the balance of payments surplus*, larger outflows from longer-term bank savings into deposits as a result of falling interest rates and a slower contraction of private sector credit.
The forecasting approach here emphasises M1 because of its closer link to spending intentions and historically superior leading indicator properties. The ECB publishes a country breakdown of overnight deposits, which comprise 83% of Eurozone M1. Six-month real overnight deposit growth is strong in Spain and – surprisingly – France, while remaining solid in Italy and Germany. Dutch weakness, however, has intensified – second chart.
In other news today, the net percentage of Eurozone consumers expecting prices to rise over the next 12 months slipped from +9% in July to +7% in August but remains broadly consistent with the ECB’s inflation target, based on history – third chart.
ECB President Draghi’s Jackson Hole speech signalled that further easing measures, including full QE, are under consideration but better monetary news and the forthcoming TLTRO suggest that a decision on action will be deferred until October at the earliest.
*Basic balance, i.e. current account plus direct / portfolio investment flows.