UK monetary trends remain upbeat, with rising corporate liquidity supporting hopes of strong business investment.
The forecasting approach here emphasises real narrow money, as measured by non-financial M1* deflated by consumer prices. This rose by 4.3%, or 8.7% annualised, in the six months to February. Growth has been stable since spring 2013 and is well above the long-run average – see chart.
Real non-financial M4, a broader measure, rose by a smaller 1.8%, or 3.5% annualised, although this represented the strongest growth since April 2009. As previously discussed, a given rate of increase of broad money supports faster nominal GDP expansion than in the past because the velocity of circulation is now on a rising trend. This partly reflects households shifting savings into non-monetary form in response to negative real deposit interest rates.
Modest overall M4 growth, in other words, has not prevented a strong rise in corporate liquidity: real M4 holdings of private non-financial corporations rose by 4.4%, or 8.9% annualised, in the latest six months.
The six-month rates of change of real non-financial M1 and M4 bottomed in April 2011, rising over the subsequent two years to peak in April 2013. Underlying two-quarter GDP expansion (i.e. excluding North Sea production and adjusting for special bank holidays and the Olympics) bottomed in the first quarter of 2012 and rose through the third quarter of 2013, stabilising in the fourth quarter. This is consistent with the monetarist rule that (real) money supply changes lead demand and output by about six months.
Stable real money trends since last spring are the basis of the forecast here that GDP will continue to rise by 0.75% per quarter through 2014**, generating full-year growth of about 3%. The first quarter, however, is likely to overshoot this projection, based on available evidence – see Friday’s post.
Real non-financial M4 lending contracted slightly in the six months to February – the claim that current economic strength is being driven by credit-fuelled excess continues to have no basis in fact.
*Currency and sterling sight deposits held by households and private non-financial firms.
**Growth averaged 0.75% in the final three quarters of 2013.
