UK monetary trends continue to give a reassuring message for economic prospects, though are less upbeat than Eurozone and US developments. Corporate liquidity, in particular, is rising fast, suggesting stronger investment and hiring after the election – providing that it delivers a stable, business-supportive government.
The favoured broad and narrow monetary aggregates here are non-financial M4 and M1, covering money holdings of households and private non-financial firms. M1 comprises notes / coin and sight deposits, with M4 adding in other deposits, repos and short-maturity bank paper. Money holdings of financial companies are volatile and less relevant for judging near-term economic prospects.
Real non-financial M1 (i.e. deflated by consumer prices) rose by a solid 3.9%, or 8.0% annualised, in the six months to March. Real non-financial M4 growth was lower but respectable at 2.8%, or 5.6% annualised. Both measures have strengthened since last summer, suggesting that the recent GDP slowdown, if confirmed, will prove temporary – see first chart.
Corporate liquidity is surging: real M4 holdings of private non-financial corporations rose by 5.7%, or 11.8% annualised, in the six months to March – the fastest since 2007, a strong year for business investment. Companies have ample resources to boost spending and expand their workforces but may be temporarily “hoarding” liquidity ahead of the election result.
Relatively sluggish household M4 growth partly reflects recent strong buying of National Savings pensioner bonds and probably has little implication for consumer spending. National Savings attracted £12.1 billion in the first quarter, a record quarterly total equivalent to 1.0% of the stock of household M4.
Monetary trends are less expansionary than in the Eurozone, where real non-financial M1 rose by 5.8%, or 12.0% annualised, in the six months to March – second chart. GDP probably grew by less than in the Eurozone in the first quarter and the UK may struggle to recapture a lead.
A caveat to the positive comments above is that recent solid real money growth owes much to temporarily low inflation. Unless nominal trends strengthen further, real money expansion will fall back during the second half as inflation rebounds, in turn implying slower economic momentum in 2016.
The best measure of US average wages is the quarterly employment cost index (ECI), which adjusts for job shifts between occupations and industries. Annual growth in ECI wages rose to 2.5% in the first quarter of 2015, the fastest since 2008. The historical relationship with the job openings or vacancies rate had signalled a pick-up and suggests a further increase – see first chart.
There is no ECI equivalent in the UK. Annual growth in average regular earnings, unadjusted for employment composition effects or weekly hours, rose to 2.2% in February, the fastest since 2011. As in the US, the historical relationship with the job openings rate suggests further strength – second chart.
The average earnings numbers are probably understating pay pressures, judging from survey evidence. The services labour costs index in the Bank of England agents’ survey, for example, is equal to its level in September 2008, when services earnings growth was over 3% – third chart.
Similarly, the current personal finances component of the EU Commission consumer confidence survey is at its strongest since 2008. The previous post argued that this component is a better guide to voter support for the governing party or parties than the overall confidence indicator. Its further rise last month, therefore, is hopeful news for the Conservatives / Liberal Democrats – fourth chart.
US / UK wage acceleration is not being matched by better productivity performance. Current data, indeed, suggest that output per hour fell in both economies in the first quarter. (The weak US result, however, was affected by bad weather and a ports strike, while the UK GDP slowdown is difficult to reconcile with other evidence and may be revised away.)
Global monetary trends are signalling a rebound in growth in the second half after a recent soft patch. Consumer price rises, meanwhile, are normalising after a temporary drag from last year’s oil price slump. Against this backdrop, the Fed and Bank of England cannot ignore clear evidence of rising unit labour cost pressures. The recent firming of US and UK market interest rate expectations is warranted and may extend.
British electors, on the face of it, are an ungrateful bunch. Consumer confidence, as measured by the EU Commission / GfK monthly indicator, is at the top of its range over the last 40 years – in the 96th percentile, to be precise, up from the 44th just before the May 2010 general election. The governing Conservative and Liberal Democrat parties, however, command the support of only 42% of voters, according to the poll of polls compiled by ukpollingreport.com, down from a 59% share at the last election.
Mismatches between consumer confidence and government popularity, in fact, are nothing new. The party of government has changed in elections four times since the early 1970s: February 1974 (Conservative to Labour), May 1979 (Conservative win), May 1997 (Labour win) and May 2010 (Conservative- Liberal Democrat coalition). Consumer confidence was also at the top of its range in 1979 and 1997, standing in the 96th and 95th percentiles respectively – see first chart. (Confidence had slumped during the 1978-79 “winter of discontent” but rebounded strongly into the election.)
It would be wrong to conclude that economic / financial factors are of little importance to voters. Statistical research reported in previous posts (e.g. here) shows that the poll difference between the main governing and opposition parties depends positively on average earnings growth and house price inflation, and negatively on interest rates, consumer price inflation and the unemployment rate. A model based on these factors explains a significant portion of historical poll variation and continues to suggest a small Conservative lead over Labour on 7 May.
Consumer confidence is an inferior political guide probably for two reasons. First, the confidence indicator is a forward-looking measure: it combines consumers’ expectations of their finances, saving behaviour, the economy and unemployment over the next 12 months. Voters, however, appear to rate governments on what they have delivered to date, discounting promised improvement, even when this is believed.
Secondly, earnings growth is much more important for voting intentions than other influences on confidence. The statistical research indicates that a 1 percentage point (pp) rise in earnings growth moves the poll gap by 4 pp in favour of the governing party; a 1 pp fall in consumer price inflation or the unemployment rate, by contrast, delivers a boost of only 1 pp. (Changes in interest rates also have a significant impact, explaining why governments and their central bank appointees try so hard to hold rates down before elections.)
These considerations suggest that political analysts should focus attention on the component of the consumer survey tracking current personal finances rather than the broader and forward-looking confidence measure. This component has lagged the pick-up in confidence, currently standing in the 70th percentile of its historical range. It is, however, rising fast, regaining its 2008 pre-recession level in March – second chart.
The Bank of England forecasts a rise in earnings growth to 3.5% in the fourth quarter of 2015, from 1.7% in the three months to February. The polling model suggests that the Conservative lead over Labour would be 6 pp if such growth was occurring now. Tory-supporting business leaders are increasingly frustrated by the lack of traction of the party’s election campaign, according to today’s Financial Times. Have they considered the impact of their own wage policies on the electoral arithmetic?
The latest Eurozone purchasing managers’ survey indicates that economic growth is currently stronger in the periphery than the core. This had been signalled by relative monetary trends in late 2014 but real money growth in the core has since caught up with the periphery, suggesting similarly solid prospects for the two groups.
The Eurozone PMI composite output index edged down in April but remains consistent with respectable economic expansion. The forward-looking new business index was little changed from its March level, a 46-month high, while the employment index reached its strongest level since August 2011.
More interesting than the headline readings was news that the output index for the “rest of the Eurozone” rose further, reaching its highest level since August 2007 and exceeding the level in Germany as well as France – see first chart. The employment index showed similar relative strength.
This outperformance had been predicted by faster real money growth in the periphery than the core in late 2014 – second chart. The gap has since closed, however, with core growth marginally higher in February.
French real money growth has risen particularly strongly and is now second to Spain in the big four ranking – third chart. The French PMI survey has lagged improvements elsewhere but may now catch up. The INSEE industrial survey for April, also released today, was more encouraging than its PMI counterpart: the turning-point indicator derived from the survey rose further and indicates a “favourable short-term economic situation”, according to the commentary – fourth chart.
Narrow money trends last autumn predicted that the Eurozone and Japanese economies would regain momentum while the US and China would slow, a shift confirmed by recent coincident data. Current monetary trends suggest that the US and Eurozone will grow solidly in the second half of 2015 with Japan expanding moderately but China remaining sluggish.
The first chart shows six-month changes in industrial output. The US and Chinese changes fell to their lowest levels since 2009 in March, although recent weakness has probably been exaggerated by special factors – bad weather and a ports strike in the US and a late New Year holiday in China. Eurozone growth in February*, by contrast, was the highest since 2011, while Japanese output has also rebounded after weakness in mid-2014.
This pattern had been suggested by monetary trends last autumn. The second chart shows six-month changes in real narrow money M1, with the last data points referring to October 2014. Eurozone real money growth was rising strongly following the ECB’s easing actions in June and September, while a recovery was under way in Japan, mainly reflecting a reversal of the inflation spike caused by April’s sales tax rise. US and Chinese trends, however, had weakened sharply, warning of an economic slowdown in early 2015, allowing for the usual half-year lead.
The third chart shows the latest monetary data. Real narrow money growth is higher than last autumn in the US, Eurozone and Japan but little changed in China**.
The most notable development has been a rebound in the US, probably partly attributable to a significant fall in Treasury yields in late 2014 / early 2015. US real money growth in February almost matched its peak in December 2012, which preceded GDP growth of 4.0% annualised in the second half of 2013.
Eurozone real money is also giving a strongly positive economic signal, with growth remaining notably higher than in Japan. This suggests that the ECB policy of imposing a negative interest rate on excess bank reserves has been more effective in delivering monetary stimulus than the Bank of Japan’s record-breaking QE.
Chinese real M1 growth appeared to be recovering in January / February but March data delivered a set-back. The broader M2 measure and bank lending are giving a more reassuring message – see previous post – but Chinese economic expansion may remain sub-par through the autumn, at least.
*February latest for Eurozone and Japan.
**March data for US, Japan, China; February for Eurozone.