Better monetary trends from mid 2011 signalled the recent recovery in UK “underlying” economic growth. March monetary statistics suggest that this recovery will extend over the remainder of 2013.

Last week's post on the first-quarter GDP estimate contained a chart showing the quarterly change in “underlying” output, i.e. gross value added* excluding oil and gas production and adjusted for extra bank holidays and the Olympics. This quarterly change has risen from a low of -0.1% in the fourth quarter of 2011 to 0.0%, 0.1%, 0.2%, 0.2% and 0.3% in the first quarter of 2013. Far from “flatlining”, the economy has been gradually gaining momentum since late 2011.

The chart below shows the change in actual and underlying output over two rather than one quarters, comparing this with the six-month change in the real “Divisia”** money supply, including and excluding money holdings of financial institutions. Economic weakness in 2011 was foreshadowed by a contraction in the real money supply starting in mid 2010. The six-month change in real non-financial Divisia, however, turned positive in late 2011 and rose steadily during 2012, signalling an accelerating economic revival from mid 2012, allowing for the typical half-year lead of money to activity.

Six-month real Divisia growth has stabilised since late 2012 but at a level historically associated with solid output expansion. The message is that economic momentum will continue to build through late 2013 (at least). The view here remains that 2013 will be the best year for the economy since 2006.

*Gross value added = gross domestic product excluding indirect taxes and subsidies.
**The Divisia measure combines the components of the M4 broad money supply using liquidity weights based on interest rates.