UK monetary trends signal that economic prospects have deteriorated but consensus gloom may have become exaggerated again.

Economists now expect the preliminary second-quarter GDP release on 26 July to report quarterly growth of only 0.2-0.3%. This partly reflects weak industrial and construction output data for May – the average levels of output in April / May were 0.5% and 1.6% respectively below their first-quarter averages.

Services output in April, however, was 0.4% above the first-quarter average and turnover data – ignored by most economists – suggest a respectable monthly increase in May. The official GDP estimate is likely to incorporate a projection of further growth in June. Services output, therefore, may be reported to have risen by 0.6% last quarter. With the sector accounting for 79% of GDP, this would suggest overall growth of 0.4% despite industrial / construction weakness – in line with the Bank of England staff’s estimate at the time of the June MPC meeting.

Gloom about consumer spending prospects was magnified by news of a fall in the household saving ratio to a record low. As previously discussed, however, the official saving ratio measure is at odds with other data indicating respectable household accumulation of financial and capital assets.

The official approach measures saving as the difference between disposable income and consumption. An alternative approach is to measure it as new investment in financial and capital assets minus borrowing. Based on the alternative approach, the saving ratio was 7.2% in the year to the first quarter versus only 4.2% for the official measure – see first chart.


The two measures are conceptually equivalent so the difference must reflect measurement error. One possibility is that the official statistics understate income, perhaps reflecting the increasing difficulty of tracking compensation as working patterns change.

According to the official data, household real disposable income fell by 1.4% in the year to the first quarter. The June EU Commission consumer survey, by contrast, reported that a balance of only 2.3% of households judged their finances to have deteriorated over the past 12 months – significantly better than the long-run average (since 1990) of 8.5%.

Pessimistic forecasters argue that a consumer slowdown will be compounded by weakness in business investment. Real* disposable income of private non-financial corporations (PNFCs), however, rose by 20.6% in the year to the first quarter, following a decline in late 2015 / early 2016  – second chart. This pick-up accords with recent stronger corporate money trends, suggesting that a first-quarter recovery in investment will be sustained.


*Real = deflated by GDP deflator.