UK money trends continue to give a reassuring signal for economic prospects. Corporate liquidity, in particular, is rising rapidly, suggesting stronger business spending.
The preferred narrow and broad money measures here are “non-financial” M1 and M4, covering holdings of households and private non-financial corporations (PNFCs)*. Annual growth of non-financial M1 was 7.4% in July, up from 6.6% in June but well below a peak of 11.7% reached in 2013. Non-financial M4 growth rose to 5.0%, the fastest since December – see first chart.
Within M4, money holdings of PNFCs rose by 11.4% in the year to July, the largest annual increase since August 2007. Business liquidity is rising faster in the UK than in the US, Japan and Eurozone – second chart**.
By contrast, annual growth of household M4 holdings fell to 3.4% in July, the lowest since March 2012. The recent slowdown reflects a shift of funds out of bank and building society deposits into National Savings products in response to attractive interest rates – National Savings inflows were £21.8 billion in the year to July, up from £4.0 billion in the previous 12 months. The sum of household M4 and the stock of funds in National Savings rose by an annual 4.8% in July versus average growth of 4.0% over 2012-14 – third chart.
Business investment expanded by 5.0% in the year to the second quarter. Overall business spending, however, fell, because firms ran down stocks last quarter, having increased them a year before. Corporate money strength suggests that investment will continue to rise solidly while stocks will be rebuilt. GDP growth, in other words, should benefit from a rebound in business spending.
The fourth chart compares the two-quarter change in GDP, excluding volatile oil and gas production, with six-month changes in real*** non-financial M1, non-financial M4 and PNFC M4. The three measures turned down before the 2008-09 recession and the 2012 “double dip” scare. Growth of real non-financial M1 and corporate M4, meanwhile, rose strongly in 2012 ahead of the “surprise” 2013 GDP acceleration.
The recent modest decline in GDP growth followed a deceleration in real non-financial M1 and corporate M4 in 2014. Growth in the two measures, however, has stabilised and risen respectively since late 2014, suggesting a recovery in GDP expansion through early 2016.
*Fluctuations in money holdings of insurance companies, pension funds and other financial corporations are less relevant for assessing near-term economic prospects.
**Latest data July for UK and Eurozone, June for Japan and March for US (quarterly).
***Real = deflated by consumer prices, seasonally adjusted.
