UK corporate money trends have weakened since late 2015, consistent with companies putting expansion plans on hold pending the result of last week's referendum.

Corporate money (i.e. held by private non-financial corporations, or PNFCs) will be a key indicator for assessing whether the referendum shock will push the economy into a recession. Corporate money leads business investment and overall activity, probably because companies adjust their liquidity position to reflect their spending / hiring plans. Real (i.e. inflation-adjusted) corporate money contracted before the 1979-81, 1990-91 and 2008-09 recessions, as well as the 2011-12 “double-dip” slowdown.

The first chart shows six-month growth rates of real corporate narrow money M1 and broad money M4, along with the two-quarter change in GDP*. Both measures were strong last autumn, consistent with recent “hard” data suggesting solid GDP expansion during the first half of 2016, allowing for a typical nine-month lead from money to activity.

The six-month change in real corporate M1, however, has fallen significantly since February, while that of real M4 has turned slightly negative. M1 is preferred here for forecasting purposes: it is closer to the concept of "transactions money" and appears to work better empirically. An example of the superior performance of real M1 was its mild contraction before the 2011-12 slowdown; a much larger fall in real M4 seemed to predict a recession. The recent decline in real M1 growth suggests that companies were planning for slower expansion but not a fall in activity before the referendum.

Weakening corporate money growth contrasts with strengthening household trends. Six-month growth of household real M1 and M4 rose to 15- and nine-year highs respectively in May, suggesting solid near-term consumer spending prospects – see second chart. Household income and money growth, however, may slow as companies curb expansion plans and hiring. Corporate money often leads household trends: corporate real M1 contracted before household real M1 ahead of the 2008-09 recession.

The base-case assumption here is that increased uncertainty due to the referendum shock will subtract 1.0-1.5 percentage points from GDP growth over the next 12 months, implying a significant slowdown rather than a recession. This view will be revised negatively if corporate real M1 contracts over coming months.

*M1 = notes / coin + sterling sight deposits. M4 = M1 + sterling time deposits, short-term bank bonds and repos.