A simple forecasting rule-of-thumb based on the money supply and share prices – a rule that correctly predicted that economic growth would strengthen in 2013-14 but moderate in 2015 – suggests that GDP will rise by more than the consensus forecast of 2.3% in 2016*.

The forecasting rule assesses growth prospects for the coming calendar year based on whether end-year levels of real (i.e. inflation-adjusted) money supply growth and share prices are higher or lower than 12 months earlier. Real money growth is measured by the annual rate of change of the broad M4ex measure deflated by the retail prices index excluding mortgage interest (RPIX). Share prices are measured by the domestically-orientated FT 30 index, again deflated by the December RPIX.

Annual GDP growth averaged 2.3% in the 50 calendar years from 1966 to 2015. The forecasting rule gave a “double-positive” signal for 16 of these years (i.e. both real money growth and share prices at the end of the prior year were higher than 12 months before). GDP growth in these years averaged 3.9%.

There were, by contrast, 11 years for which the forecasting rule gave a “double-negative” signal. Growth in these years averaged just 0.3%. In the remaining 23 cases where the money supply and share prices gave conflicting signals, GDP expansion averaged 2.2%.

The rule has continued to work well in recent years. A double-negative warning was given at end-2008 ahead of a 4.2% GDP slump in 2009. A double-positive at end-2012, meanwhile, signalled that growth would pick up significantly in 2013: GDP rose by 2.8% in the year to the fourth quarter, with strength sustained in 2014.

The rule suggested that 2015 would be an “average” year for growth: real money growth in December 2014 was higher than a year before but real share prices were lower. The current consensus estimate is that GDP rose by 2.4% in 2015.

What is the message for 2016? The average level of the FT 30 index in December 2015 (through 29 December) was 4.3% higher than in December 2014, implying a real gain of 3.1% allowing for expected December RPIX inflation of 1.2%. (The FTSE 100 and all-share indices were lower in December than a year before but this reflects their international / commodities exposure. The FTSE 250 mid-cap index better represents the UK economy and, like the FT 30, rose during 2015.)

The annual rate of change of real M4ex, meanwhile, was 3.7% in October versus 2.7% at end-2014. M4ex growth, moreover, was depressed in 2015 by a diversion of household savings flows into National Savings, reflecting competitive interest rates. A broader liquidity measure including NS products has shown greater acceleration since end-2014.

Assuming stable real money growth in November / December, therefore, both elements of the forecasting rule will give a positive signal for 2016, suggesting GDP growth above the long-run average of 2.3% – also the current consensus projection.

How could a positive growth surprise be generated? Possible drivers include:

• Solid consumer spending. Household consumption grew by 3.0% in the year to the third quarter of 2015, the largest annual increase since the fourth quarter of 2007. Real pay may continue to rise strongly in 2016, with faster nominal growth offsetting a recovery in inflation. The saving ratio is low but may remain depressed against a backdrop of increasing household wealth and still-falling borrowing costs: the ratio of net wealth to disposable income reached another record in 2015 while interest payments declined to 4.8% of income in the third quarter from 5.2% a year before.

• Stronger investment. Business investment rose by an annual 5.8% in the third quarter and may accelerate further as consumption growth remains solid and the “output gap” closes. Corporate money holdings – a leading indicator – have surged, rising by 12.7% in the year to October. Infrastructure investment, meanwhile, is strengthening – new infrastructure orders in the third quarter were 63% higher than a year before – and repairs related to the end-2015 floods may also support construction activity.

• A turnaround in the stocks cycle. A fall in stockbuilding cut GDP growth in the year to the third quarter by 0.9 percentage points, according to current official statistics (which may, however, be revised significantly). With consumer spending / business investment rising solidly, stock levels may now be better aligned with final demand, suggesting a neutral or positive growth contribution in 2016.

Fiscal tightening and weaker external trade are possible drags on growth in 2016, while uncertainty related to the Brexit referendum may delay an investment pick-up. The degree of fiscal restriction, however, is projected by the Office for Budget Responsibility to be little changed between 2015-16 and 2016-17, while net exports may be supported by a continued economic recovery in the Eurozone and recent sterling depreciation against the US dollar.

*Consensus figures from the Treasury’s monthly survey of forecasters.