Soft UK GDP growth in the first quarter of 2017 partly reflected pay-back for a strong fourth quarter and a recovery seems likely in the current quarter. Monetary trends, however, have deteriorated significantly since the autumn, suggesting notably weaker second-half economic performance.

The preliminary estimate of a 0.3% rise in GDP in the first quarter released last week was in line with the suggestion from monthly data – see previous post. The preference here is to focus on six-month or two-quarter changes to assess trends in economic series. The weak first-quarter GDP rise followed a 0.7% fourth-quarter gain, which could be revised higher later this month, based on recent services turnover data. Growth across the two quarters, therefore, is currently estimated at 1.0%, or 1.9% at an annualised rate – faster than in the US (1.4%) and the same as in Euroland.

This solid performance was signalled by monetary trends – six-month growth of real (i.e. inflation-adjusted) narrow and broad money remained elevated through September / October 2016 and typically leads economic momentum by six to 12 months. On this basis, economic news may remain reasonably positive in the current quarter, with GDP growth recovering from the first-quarter disappointment.

Real money measures, however, slowed sharply around year-end, reflecting both lower nominal growth and faster inflation. March numbers released today were respectable in month-on-month terms but failed to reverse the deteriorating trend. The preferred narrow and broad aggregates here are non-financial M1 and non-financial M4, comprising money holdings of households and private non-financial corporations (PNFCs). Six-month growth rates of these aggregates, deflated by consumer prices (seasonally adjusted), were the weakest since 2011-12 – see first chart.


The real money measures are not yet contracting, as they did before the 2011-12 “double dip” scare. The fall in six-month growth, however, has been comparable in scale to the 2010-11 decline. GDP expansion averaged only 1.3% at an annualised rate in the two years to end-2012 – similar sluggishness may be in prospect unless monetary trends revive.

Annual growth of nominal non-financial M1 and non-financial M4 fell to 8.5% and 5.2% respectively in March, suggesting that annual nominal GDP expansion will moderate later in 2017 – second chart. Money trends are now notably weaker in the UK than Euroland, where annual growth of non-financial M1 and non-financial M3 rose further to 10.1% and 6.1% respectively in March – see previous post.


Annual growth of the Bank of England’s M4ex measure is stronger than that of the non-financial M4 aggregate tracked here, at 6.7% in March – second chart. M4ex continues to be inflated by a rapid rise in money holdings (and bank borrowing) of non-bank financial institutions, excluding intermediaries (i.e. insurance companies and pension funds, other fund managers and securities dealers). Such holdings increased by 16.4% in the year to March but have little if any implication for near-term economic prospects.

The third chart breaks out household and corporate real narrow money growth. The household component is weaker, consistent with a consumption-led economic slowdown.


The MPC is in a dilemma of its own making. Inflation is on course to rise significantly in 2017-18 in lagged response to monetary acceleration in 2015-16. The MPC should have leant against this pick-up by tightening policy in 2016 – the post-Brexit-vote easing was badly misjudged. It will be reluctant to correct this mistake against a backdrop of slowing economic momentum but inaction risks encouraging further sterling selling and entrenching higher inflation.