Here’s a productivity-enhancing suggestion for students of the Bank of England’s Inflation Report. To deduce the policy message, ignore the copious verbiage and focus on a single statistic – the mean forecast for inflation in two years’ time based on unchanged policy. A number above 2.0% signals that policy tightening is required. If, in addition, the number is higher than last time, tightening is judged to be more urgent.

Both conditions were met in the latest Report. The mean two-year-ahead forecast is 2.35%, up from 2.19% in February. The MPC, therefore, has become slightly more hawkish, although Mark Carney was at pains not to disturb current market expectations of a first rate rise next spring in his press conference comments. The rise in the two-year-ahead forecast follows cuts in February and November – see first chart.

This hawkish shift, despite a downward revision to GDP growth, reflects greater pessimism about near-term supply prospects. Productivity is now projected to rise by only 0.25% this year, down from 0.75% in February.

The expectation here is that a further hawkish adjustment will occur by August as pay growth exceeds the MPC’s downwardly-revised forecast. Today’s labour market report, unseen by the Bank, showed annual growth of average weekly earnings of 1.9% in the three months to March, and 3.3% in March alone, which compares with a projection of 2.5% in the fourth quarter of 2015 (cut, strangely, from 3.5% in February). The job openings or vacancies rate continues to suggest a pick-up in pay pressures – second chart.

(A monetarist gripe: The May Report contains nine pages of analysis of potential supply but only three sentences about monetary developments. The Bank’s long tradition of ignoring money continues, despite its key role in the 2005-09 financial boom / bust.)

The recent surge in global government bond yields is consistent with the forecast here that growth and inflation will rebound in the second half of 2015, resulting in a change in direction of monetary policies.

A post in February suggested that global growth would pull back into mid-2015 before strengthening significantly in the second half. A pick-up was expected because real narrow money expansion had risen sharply in late 2014 / early 2015 and typically leads activity by six to 12 months.

An April update concluded that this scenario remained on track and, together with a likely inflation rebound, posed a risk to government bond markets. A post in March had noted that Eurozone real yields were at a similar negative level to those in the US in 2012 ahead of a major market sell-off.

Full monetary data are now available for March. Six-month growth of global real narrow money fell back from February’s 38-month high but remains well above its 2014 average – see first chart. The monetary signal, therefore, remains green.

The forecast of a stronger second half is also now receiving support from the global longer leading indicator calculated here. The indicator drifted lower into February but recovered in March and appears to have risen sharply in April, based on preliminary data – first chart.

Another market development consistent with the forecast growth rebound is recent outperformance of stocks in “cyclical” industries relative to “non-cyclicals”. The relative performance of cyclicals correlates with G7 manufacturing purchasing managers’ new orders, which recovered slightly in April – second chart.

Will second-half economic strength carry over into 2016? As noted, real narrow money growth slipped in March and may fall further as inflation rebounds, unless nominal trends accelerate. The suggestion is that the coming economic pick-up will prove to be another false dawn. Markets, however, have probably yet to adjust fully to the near-term positive momentum change. Bond yields may have further to rise.

With a few seats still to declare, the Conservative vote share is slightly higher than the 36.1% achieved at the 2010 election and about 6 percentage points (pp) ahead of Labour. This compares with a 2 pp margin predicted by the economic model described in a previous post, based on current values of the input variables.

The difference between the actual 6 pp lead and the 2 pp prediction probably reflects two factors. First, the SNP increased its vote share by 3 pp, mostly at the expense of Labour. Secondly, voters appear to have given the Tories some credit for expected further economic improvements: the model had indicated that their lead would be 6 pp if the economic conditions forecast by the Bank of England for the fourth quarter of 2015 were in place now.

Eurozone March money numbers released last week showed further solid monthly gains in M1 and M3, supporting optimism about near-term economic prospects. The country detail, however, was the more interesting feature of the data.

In the big four economies, six-month growth of real M1 deposits* is now strongest in France – see first chart. Recent purchasing managers’ surveys have been much weaker in France than the rest of the Eurozone but the money pick-up suggests that economic news will surprise positively over coming months.

Spain had been topping the ranking but real M1 deposit growth has fallen since end-2014, though remains healthy. GDP rose by 0.7% and 0.9% respectively in the fourth and first quarters but gains may moderate ahead of the general election due by December.

In the three bailout economies, real narrow money trends remain strong in Ireland but have softened in Portugal while turning negative in Greece – second chart. As in Spain, the Portuguese slowdown may be relevant for parliamentary elections due in September-October. Greek real money growth had picked up in late 2014 and was being reflected in an economic recovery, which the confidence-sapping actions of the incoming Syriza-led government have aborted: the current recession cannot be blamed on externally-imposed “austerity”.

*M1 comprises notes / coins and overnight deposits. A country breakdown is available only for the latter.

UK monetary trends continue to give a reassuring message for economic prospects, though are less upbeat than Eurozone and US developments. Corporate liquidity, in particular, is rising fast, suggesting stronger investment and hiring after the election – providing that it delivers a stable, business-supportive government.

The favoured broad and narrow monetary aggregates here are non-financial M4 and M1, covering money holdings of households and private non-financial firms. M1 comprises notes / coin and sight deposits, with M4 adding in other deposits, repos and short-maturity bank paper. Money holdings of financial companies are volatile and less relevant for judging near-term economic prospects.

Real non-financial M1 (i.e. deflated by consumer prices) rose by a solid 3.9%, or 8.0% annualised, in the six months to March. Real non-financial M4 growth was lower but respectable at 2.8%, or 5.6% annualised. Both measures have strengthened since last summer, suggesting that the recent GDP slowdown, if confirmed, will prove temporary – see first chart.

Corporate liquidity is surging: real M4 holdings of private non-financial corporations rose by 5.7%, or 11.8% annualised, in the six months to March – the fastest since 2007, a strong year for business investment. Companies have ample resources to boost spending and expand their workforces but may be temporarily “hoarding” liquidity ahead of the election result.

Relatively sluggish household M4 growth partly reflects recent strong buying of National Savings pensioner bonds and probably has little implication for consumer spending. National Savings attracted £12.1 billion in the first quarter, a record quarterly total equivalent to 1.0% of the stock of household M4.

Monetary trends are less expansionary than in the Eurozone, where real non-financial M1 rose by 5.8%, or 12.0% annualised, in the six months to March – second chart. GDP probably grew by less than in the Eurozone in the first quarter and the UK may struggle to recapture a lead.

A caveat to the positive comments above is that recent solid real money growth owes much to temporarily low inflation. Unless nominal trends strengthen further, real money expansion will fall back during the second half as inflation rebounds, in turn implying slower economic momentum in 2016.

The best measure of US average wages is the quarterly employment cost index (ECI), which adjusts for job shifts between occupations and industries. Annual growth in ECI wages rose to 2.5% in the first quarter of 2015, the fastest since 2008. The historical relationship with the job openings or vacancies rate had signalled a pick-up and suggests a further increase – see first chart.


There is no ECI equivalent in the UK. Annual growth in average regular earnings, unadjusted for employment composition effects or weekly hours, rose to 2.2% in February, the fastest since 2011. As in the US, the historical relationship with the job openings rate suggests further strength – second chart.


The average earnings numbers are probably understating pay pressures, judging from survey evidence. The services labour costs index in the Bank of England agents’ survey, for example, is equal to its level in September 2008, when services earnings growth was over 3% – third chart.


Similarly, the current personal finances component of the EU Commission consumer confidence survey is at its strongest since 2008. The previous post argued that this component is a better guide to voter support for the governing party or parties than the overall confidence indicator. Its further rise last month, therefore, is hopeful news for the Conservatives / Liberal Democrats – fourth chart.


US / UK wage acceleration is not being matched by better productivity performance. Current data, indeed, suggest that output per hour fell in both economies in the first quarter. (The weak US result, however, was affected by bad weather and a ports strike, while the UK GDP slowdown is difficult to reconcile with other evidence and may be revised away.)

Global monetary trends are signalling a rebound in growth in the second half after a recent soft patch. Consumer price rises, meanwhile, are normalising after a temporary drag from last year’s oil price slump. Against this backdrop, the Fed and Bank of England cannot ignore clear evidence of rising unit labour cost pressures. The recent firming of US and UK market interest rate expectations is warranted and may extend.