UK monetary trends are signalling strong second-half economic expansion but hint that growth will moderate, while remaining solid, around year-end.
The broad and narrow monetary aggregates favoured here are non-financial M4 and M1, comprising holdings of the household sector and private non-financial corporations (PNFCs). Annual growth in the M4 measure was little changed at 5.4% in July, versus a recent peak of 5.6% in April, while M1 expansion rose further to 10.8% – the highest since August 2004.
Future economic activity, however, is related to real (i.e. inflation-adjusted) rather than nominal monetary expansion. The forecasting approach here, moreover, focuses on six-month rather than annual growth, reflecting the typical six-month lag between monetary changes and their effect on the economy.
The latest six-month changes in real non-financial M4 and M1 are respectable and strong respectively but both have moderated from peaks in April – see first chart. This suggests that economic growth will peak in late 2013, slowing slightly in early 2014.
The recent moderation in real money supply trends reflects a combination of lower nominal expansion and slightly faster price rises.
The consensus is likely to focus on a rise in bank lending in July – the stock of lending to households and PNFCs increased by £4.1 billion, or 0.3%, the most since February 2009. Credit is, at best, a coincident indicator of the economy so this simply confirms the positive message from other recent data. The lending recovery, however, may reinforce current "feel-good" sentiment.
Nominal rather than real money expansion is relevant for assessing inflation prospects. The rise in annual non-financial M4 growth between August 2011 and April 2013, with little change more recently, suggests that core inflation will trend higher through mid-2015, allowing for an average two-year lag between monetary changes and prices – see second chart and previous post for details.
In other UK news today, the EU Commission consumer confidence measure, based on a survey conducted by GfK, continued to surge higher in August and is now well above its long-run average – third chart. The net percentage of respondents expecting labour market weakness fell to its lowest level since March 2005, supporting the forecast here of a rapid decline in the unemployment rate.
