There is no negative message for UK economic prospects in June monetary data. Narrow money, broad money and bank lending all grew solidly on the month, maintaining recent upbeat trends. The suggestion is that the economy was on course to expand strongly before the Brexit vote shock, offering hope that existing momentum will avert any near-term contraction of demand and output. The June numbers incorporate only one week of post-vote flows – July / August data will be much more important for assessing economic prospects.
The favoured narrow and broad money measures here are “non-financial” M1 and M4, comprising money holdings of households and private non-financial corporations (PNFCs). These measures grew by 1.0% and 0.6% respectively in June, while bank lending to households and PNFCs gained 0.4%.
Annual growth of non-financial M1 rose to 9.3%, the fastest since 2014. Non-financial M4 growth climbed to 6.4% and bank lending expansion to 4.0%, the fastest since 2008 and 2009 respectively – see first chart.
The forecasting approach here focuses on the six-month rate of change of real (i.e. inflation-adjusted) non-financial M1. A rise in this measure starting last autumn suggested that GDP momentum would firm during 2016; stronger second-quarter growth reported this week is consistent with this forecast. Real non-financial M1 expansion has continued to pick up, closing in on its 2013 high in June – second chart.
Previous posts expressed concern that narrow money strength reflected the household component while corporate M1 was slowing, suggesting rising business caution. Corporate M1 turned down ahead of household M1 before the 2008-09 recession. Six-month growth of real PNFC M1, however, rebounded sharply in June, returning to its level in late 2015 / early 2016 – third chart. Corporate as well as household narrow money trends, therefore, were positive before the Brexit vote.
Other noteworthy features of the June statistics include:
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Annual growth of the Bank of England’s favoured broad money measure, M4ex, rose to 5.8%, the fastest since 2008. M4ex equals non-financial M4 plus money holdings of some financial institutions (i.e. excluding intermediaries). (Financial sector money is volatile and less relevant for assessing prospects for spending on goods and services.)
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Broad money growth was depressed in 2015 by households switching out of bank deposits into National Savings products – in particular, the high-interest pensioner bonds made available for a brief period before the election. (Such products are excluded from M4.) This effect has reversed in 2016 – there was net outflow from National Savings in May and June. A wider measure of non-financial liquidity comprising non-financial M4 and the stock of National Savings rose by an annual 6.3% in June, below a recent peak of 6.7% reached in November 2015.
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While bank lending to households and PNFCs grew by an annual 4.0% in June, total (M4Lex) lending – i.e. including loans to non-intermediate financial institutions – rose by a much faster 6.8%. Lending to such institutions surged by 35.8%. This appears to reflect borrowing by or on behalf of pension funds in connection with liability-driven investment strategies.
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External and foreign currency flows had a large positive impact on M4 in June, suggesting that the balance of payments non-bank capital account was in significant surplus. A possible explanation is that investors moved funds into the UK ahead of the referendum in anticipation of a remain victory. This would accord with exchange rate behaviour – the pound reached its high for the year against the US dollar on the day of the vote before collapsing in response to the shock result.