Monetary trends signalled the recent pick-up in UK growth and suggest that the economy will continue to expand solidly during the second half.
The broad and narrow money supply measures preferred here are non-financial M4 and M1, comprising holdings of households and private non-financial corporations*. The annual increase in non-financial M4 was little changed at 5.5% in May; recent growth is the fastest since 2008. M1, however, accelerated further, its annual rise reaching double-digits (10.3%) for the first time since 2006 – see chart.
M1 has been boosted by a collapse in interest rates on notice accounts and time deposits (including fixed-rate bonds), partly reflecting banks’ access to cheap finance from the funding for lending scheme; the opportunity cost of holding instant-access money, in other words, has fallen. This does not diminish the economic significance of the pick-up: the shift into M1 is evidence that lower rates are affecting consumer and business behaviour and should be associated with higher spending in the economy, i.e. a rise in M4 velocity.
The consensus, of course, pays no attention to M1, instead focusing on lending to the private sector – usually a lagging indicator of activity, helping to explain why the consensus failed to forecast recent economic strengthening. While lending is currently still weak, improving prospects are suggested by a 3.3% rise in arranged but undrawn sterling credit facilities in the six months to May – such facilities fell steadily over 2008-12.
*Financial sector money holdings are less likely to be spent in the economy; put differently, financial money must be transferred to other sectors to have an expansionary impact.
