UK monetary trends continue to support optimism about growth prospects while arguing against more QE.
The preferred broad and narrow money aggregates here are M4 and M1 excluding financial sector holdings*. Annual growth in non-financial M4 climbed further to 5.3% in January, the highest since July 2008 – see first chart. Non-financial M1 is expanding faster, partly reflecting cash moving out of term and notice accounts into sight deposits in response to a recent large fall in interest rates** – its annual growth reached 7.1% in January, the best since July 2007.
Importantly, broad money has continued to rise solidly since the Bank of England suspended QE in early November – non-financial M4 grew by an annualised 6.2% in the three months to January. This provides indirect support for the argument of a previous post that QE has had a much smaller impact on broad money than claimed by the Bank.
The recent pick-up in non-financial M4 growth has been concentrated in the company sector – stronger corporate liquidity typically encourages more investment, hiring and M&A. Non-financial companies’ sterling and foreign currency deposits at UK banks grew by an annual 7.4% in January. Corporate liquidity is rising faster in the UK than in other major economies*** – second chart.
In other UK news today, February’s manufacturing purchasing managers’ survey was disappointingly weak, with the key new orders component slumping to a six-month low, although this reportedly partly reflected disruption caused by the poor weather.
More encouragingly, new construction orders climbed by 3.4% in the fourth quarter on the back of a 10.5% third-quarter gain, suggesting that construction output will contribute positively to GDP growth during the first half – third chart.
*Financial holdings are an important determinant of asset prices but non-financial money, i.e. held by households and non-financial companies, is likely to be more closely related to immediate economic prospects. Non-financial M1 is not calculated by the Bank of England but can be constructed from published data.
**Largely reflecting the Funding for Lending Scheme – see previous post.
***Based on the latest available data – September for the US, December for Japan and January for the Eurozone.
