The suggestion from media and economists’ commentary is that the current UK economic boomlet has appeared “out of the blue” and was essentially unpredictable. Not so. A return to robust growth was signalled by an acceleration of real (i.e. inflation-adjusted) broad and narrow money during 2012 and early 2013. This contributed to a December forecast here that the economy would expand by about 2% on an annual average basis in 2013, implying a significantly larger rise during the course of the year (i.e. between the fourth quarters of 2012 and 2013).

The “best” signal was given by narrow money M1, comprising physical cash and sight deposits – monetary components more likely to be related to future economic transactions. Six-month growth in real non-financial M1* reached 5.1% at an annualised rate by December 2012 and rose further to 10.3% in April 2013 – the highest since August 2004, ahead of very strong economic expansion**.

As noted in a post last week, real M1 growth has slowed slightly since the spring, suggesting that economic momentum will moderate – while remaining solid – in early 2014.

M1 was the favoured monetary aggregate of the late Sir Alan Walters, chief economic adviser to Mrs Thatcher, but is now widely ignored – the author of this journal is unaware of any other private-sector economist who bothers even to monitor its behaviour. The strong rise in M1 growth in 2012 and early 2013 was certainly noticed by monetary economists at the Bank of England but they seem to have either underplayed its significance or else been overruled during the forecasting process.

“Monetarist” analysis remains deeply unfashionable so renewed interest in M1 is unlikely, despite its recent forecasting success – good news for anyone seeking to use monetary signals to gain an edge on the consensus.

*M1 held by households and private non-financial firms.
**Gross value added excluding oil and gas rose by 5.4% in the year to the fourth quarter of 2005.