Everyone, it seems, is positive about UK economic prospects. It is easy to be bullish when GDP has expanded solidly for four successive quarters, business surveys are strong and consumer confidence is hitting records. It was much harder in early 2013, when coincident indicators were weak and “triple dip” talk was fashionable. That was when a monetarist forecasting approach proved its worth.

The few economists who bother to examine the data know that real narrow money – specifically, non-financial M1* deflated by consumer prices – outperforms other money / lending measures as a leading indicator of the economy. This aggregate accelerated steadily through 2012 and was growing strongly by early 2013. The clear message was that the “triple dip” was nonsense and the economy would outperform expectations significantly in 2013.

So what is real narrow money signalling now? Six-month growth remains strong but has moderated in early 2014, with April’s reading the lowest since March 2013 – see chart. This suggests that GDP will continue to expand robustly through the third quarter but may slow slightly in late 2014.

Broad money, while less reliable, is also giving a benign message. Six-month growth of real non-financial M4, indeed, has moved slightly higher in 2014, though remains modest by historical standards. As previously explained, broad money trends are understating monetary laxity because falling deposit interest rates are depressing the demand to hold savings in monetary form. The velocity of circulation, in other words, is now rising**, implying that a given rate of broad money growth is more expansionary than in the past.

Credit trends contain little information about economic prospects. The six-month change in real non-financial M4 lending has recovered to zero in lagged response to faster GDP expansion. Arranged credit facilities – a leading indicator – do not suggest any imminent strong pick-up. The Bank of England, bizarrely, is considering “macroprudential” tinkering to restrict credit supply; it should focus, instead, on the inflation / asset bubble risks posed by monetary excess.
 
*Non-financial M1 comprises notes / coin and sterling sight deposits held by households and private non-financial firms.
**The ratio of nominal GDP to non-financial M4 (lagged six quarters) rose by 0.6% per annum between the second quarter of 2009 and the first quarter of 2014 versus a 3.2% pa decline over the prior 10 years.