The optimism here about UK growth prospects for 2013, based on faster real money supply expansion during 2012, is supported by encouraging February surveys of services and retailing. The new business index of the services purchasing managers’ survey reached a nine-month high, while British Retail Consortium members reported annual sales growth of 4.4% – the best since April 2011 (artificially boosted by Easter timings).

The pick-up in these sectors increases the probability of an expansion of GDP in the current quarter and should quell tiresome “triple-dip” talk*. Weaker February purchasing managers’ survey results for manufacturing and construction appear partly to reflect temporary disruption due to bad weather. As noted in a post last week, a rebound in construction orders during the second half of 2012 suggests that the sector will contribute to growth during the first half – orders are a more reliable guide to future output than the construction PMI.

Incorporating the PMI results, the “MPC-ometer” model followed here – which predicted that several members would vote for additional stimulus at the February meeting – continues to suggest a “hold” decision this week.

In other UK news today, the Office for National Statistics reported that the value of mergers and acquisitions involving a UK target in the fourth quarter of 2012 was the lowest since the second quarter of 2009. M&A activity, however, has picked up in early 2013, with Bloomberg reporting deals worth £38.8 billion so far versus £33.7 billion in the fourth quarter. Surging corporate liquidity – see previous post – suggests a further rise.

*As previously discussed, the onshore economy has yet to suffer a double-dip and, adjusted for the Olympics boost, expanded in both the third and fourth quarters of 2012.

With data available for all but one country (Korea), six-month growth in G7 plus emerging E7 real narrow money is estimated to have firmed to 3.6% (not annualised) in January from 3.5% in December. The January estimate is down from 4.2% in October but is solid by historical standards – see chart. Allowing for the usual half-year lead from money to the economy, the suggestion is that six-month industrial output expansion will peak in the spring but remain respectable into the summer.

Global real narrow money correctly signalled last year’s economic weakness – its six-month growth slumped from 4.8% in October 2011 to 1.9% in April 2012, before reviving to the October peak. Global industrial momentum slowed sharply over the spring and summer of 2012, reaching a low in September, i.e. five months after the real money trough. The subsequent recovery in global industrial activity appears to have extended in February, judging from manufacturing purchasing managers’ surveys released last week.

While narrow money works better empirically, broad money trends also suggest continuing economic expansion – six-month G7 plus E7 real broad money growth was an estimated 2.6% in January.

The January global money numbers may have benefited from a temporary boost to Chinese data from the late New Year holiday. China will issue February statistics next week.

The next key release for assessing global economic prospects will be the January update of the OECD’s country leading indicators on Monday 11 March. As previously discussed, the global longer leading indicator calculated here from the OECD data currently suggests a modest economic slowdown from the spring, echoing the message from real money trends.

UK monetary trends continue to support optimism about growth prospects while arguing against more QE.

The preferred broad and narrow money aggregates here are M4 and M1 excluding financial sector holdings*. Annual growth in non-financial M4 climbed further to 5.3% in January, the highest since July 2008 – see first chart. Non-financial M1 is expanding faster, partly reflecting cash moving out of term and notice accounts into sight deposits in response to a recent large fall in interest rates** – its annual growth reached 7.1% in January, the best since July 2007.

Importantly, broad money has continued to rise solidly since the Bank of England suspended QE in early November – non-financial M4 grew by an annualised 6.2% in the three months to January. This provides indirect support for the argument of a previous post that QE has had a much smaller impact on broad money than claimed by the Bank.

The recent pick-up in non-financial M4 growth has been concentrated in the company sector – stronger corporate liquidity typically encourages more investment, hiring and M&A. Non-financial companies’ sterling and foreign currency deposits at UK banks grew by an annual 7.4% in January. Corporate liquidity is rising faster in the UK than in other major economies*** – second chart.

In other UK news today, February’s manufacturing purchasing managers’ survey was disappointingly weak, with the key new orders component slumping to a six-month low, although this reportedly partly reflected disruption caused by the poor weather.

More encouragingly, new construction orders climbed by 3.4% in the fourth quarter on the back of a 10.5% third-quarter gain, suggesting that construction output will contribute positively to GDP growth during the first half – third chart.

*Financial holdings are an important determinant of asset prices but non-financial money, i.e. held by households and non-financial companies, is likely to be more closely related to immediate economic prospects. Non-financial M1 is not calculated by the Bank of England but can be constructed from published data.

**Largely reflecting the Funding for Lending Scheme – see previous post.

***Based on the latest available data – September for the US, December for Japan and January for the Eurozone.