UK money trends remain solid, arguing against the consensus forecast of an economic slowdown in 2017. Narrow money holdings of both households and private non-financial corporations (PNFCs) are expanding robustly, suggesting that consumers plan to increase spending despite talk of a coming real wage squeeze, while businesses are not yet reining in expansion in response to Brexit uncertainty.
The preferred narrow and broad money measures here are non-financial M1 / M4, covering household and PNFC holdings but excluding volatile financial sector deposits, which are less relevant for assessing near-term spending prospects. Non-financial M1 rose by 0.7% in October, while non-financial M4 increased by 0.3%. Annual growth rates were 9.9% and 6.4% respectively, down from 10.1% and 6.8% in September but high by post-crisis standards.
Six-month growth rates of real (i.e. consumer price-adjusted) non-financial M1 / M4 have risen since mid 2015, with this pick-up subsequently reflected in faster economic expansion. The real money growth measures are below recent peaks but remain solid, suggesting that GDP / gross value added (GVA) will continue to rise at an annualised 2.0-2.5% pace – see first chart.
The sectoral breakdown is also reassuring. Six-month growth of real household M1 picked up strongly in early 2016, correctly signalling recent consumption buoyancy. It has moderated recently but remains consistent with respectable spending expansion. Corporate real M1 growth, by contrast, has rebounded from weakness in early 2016, suggesting that firms are revising up investment plans in response to stronger-than-expected economic expansion and favourable financing conditions, despite Brexit uncertainty – second chart.
