Narrow money trends last summer signalled that the US economy would be weak in late 2015 / early 2016 while the Eurozone and UK would grow solidly. The latest GDP numbers are consistent with this forecast. Monetary trends continue to give a positive message for Eurozone / UK economic prospects and suggest that US growth will revive during the second half.

The quarterly rise in GDP in the first quarter was 0.6% in the Eurozone, 0.4% in the UK (0.44% excluding oil and gas extraction) and only 0.1% in the US.  Over the fourth and first quarters combined, GDP grew by 0.9% in the Eurozone, 1.0% in the UK (1.1% ex oil and gas) and 0.5% in the US.

The first chart shows six-month growth rates of real (i.e. inflation-adjusted) narrow money. Growth in the US was well below that in the Eurozone and UK between June 2015 and March 2016. Weekly US data indicate a marked improvement in April – the final US data point in the chart is an April estimate. Assuming that this pick-up is confirmed, the suggestion is that US GDP growth will catch up with European performance.



Hopes of a significant US bounce-back in the second quarter, however, may be disappointed. US six-month real narrow money growth bottomed in October and monetary trends typically lead economic activity by about nine months. Real money growth, moreover, remained weak until recently.

An additional near-term concern is that US firms have made less progress with inventory adjustment than expected. Stockbuilding has fallen for three successive quarters but still amounted to 0.4% of GDP in the first quarter. With spending on goods contracting last quarter, the ratio of real inventories to final demand for goods and structures rose further – second chart. The stocks cycle, therefore, is likely to remain a drag on growth into the summer, at least.



The Eurozone and UK released money and credit data for March this week. Trends remain solid in both cases. In the UK, annual growth of narrow money, as measured by non-financial M1*, was 8.3% in March, up from 7.5% a year ago. Growth of the broader non-financial M4 measure rose further to 6.3%, the fastest since June 2008. The Bank of England’s preferred broad measure, M4ex, expanded by a smaller 4.8% in the latest 12 months but has been depressed by a fall in financial sector deposits, which are of less relevance for assessing near-term economic prospects – third chart.



Annual growth of private sector credit, as measured by M4ex lending, surged to 5.2% in March, the fastest since March 2009. A near-term setback is possible, with recent credit expansion boosted by unusually high borrowing by fund managers and a bringing-forward of buy-to-let and second home purchases to avoid the recent stamp duty rise.

The juxtaposition of consensus gloom about UK economic prospects with strengthening monetary trends is reminiscent of late 2012 / early 2013, ahead of surprisingly robust GDP expansion.

Annual growth of non-financial M1 in the Eurozone remains higher than in the UK, at 9.8% in March, while broad money growth is similar and credit expansion weaker – fourth chart. The ECB bank lending survey, however, continues to show a large majority of banks expecting stronger credit demand, suggesting a further recovery in loan growth – fifth chart.





*Non-financial = held by households and non-financial corporations.