A post in November argued that UK economic prospects were improving, based on an actual and prospective recovery in real broad money expansion. Recent evidence supports this forecast, suggesting that GDP growth this year will exceed the consensus estimate of 0.5%, barring renewed global turmoil.

1)    The combined output of the services and industrial sectors – 92% of the economy – rose by 0.4% in January from its fourth-quarter level. Construction could hold back first-quarter GDP but any weakness may prove temporary, judging from construction PMI results for March, showing new orders at a four-and-a-half-year high.

2)    The real broad money pick-up that formed the basis for the forecast has extended in early 2012, with six-month growth of real non-financial M4 rising to 0.6% in February – the fastest since early 2009, ahead of a spurt in economic expansion. Real narrow money M1, however, is weaker now than then, suggesting more modest GDP acceleration.

3)    The underreported first-quarter CBI financial services survey released yesterday was upbeat, with seasonally-adjusted optimism rebounding to its best level since 2009. The finance survey usually leads CBI polls of other sectors:


4)    Today’s British Chambers of Commerce survey was similarly encouraging, with seasonally-adjusted orders back firmly in expansionary territory:


5)    A more formal statistical assessment is provided by a monetary forecasting model designed to estimate the probability of a recession three quarters in advance. The model was last described in a post in October, when it suggested that the economy would skirt a recession and – on defensible assumptions – revive during 2012. The probability estimate peaked at 45% in the fourth quarter but has fallen sharply in early 2012, to below 10% (i.e. it is judged less than 10% likely that the economy will be in a recession at the end of 2012):

Signs of economic improvement should not be interpreted as validating the MPC’s decision to launch QE2 last autumn. The monetary forecasting model was suggesting a better 2012 before the additional liquidity injection – see the October post. QE2 has been stimulative but was not warranted by inflation prospects – the consensus is shifting towards the view here that the annual CPI increase will remain comfortably above 2% through 2012 and the Bank’s actions have increased the probability of the overshoot extending still further.

The G7 manufacturing PMI new orders index – a measure of global industrial momentum – slipped for a second month in March while remaining comfortably in expansion territory. The US component was again the strongest but there were upside surprises last month in Japan and the UK, while the Eurozone survey disappointed – see first and second charts.

The forecast here is that global industrial momentum will wane after May, based on a slowdown in real money supply expansion since November. This suggests that G7 PMI new orders will hold up over the spring and may reverse their February / March slippage. G7 retail sales grew solidly in the three months to February and often lead the PMI measure – third chart.

Outside the G7, the “official” Chinese new orders measure firmed last month, even after allowing for a positive seasonal effect – fourth chart. This contrasts with weakness in the alternative Markit measure but the official survey has tended to be more reliable historically.

The judgement here has been that it is too early to bet heavily on a global slowdown later in 2012 –  the monetary warning signal has yet to be confirmed by a fall in a proprietary leading indicator based on the OECD’s country leading indices, while annual real money growth is currently still above industrial output expansion, suggesting “excess” liquidity support for markets. Central banks, moreover, remain expansionary – fifth chart.

The next key data release will be a February update of the OECD leading indices on 10 April. A decline in the leading indicator, however, may occur in March (reading available in mid May) rather than February, based on an average three-month lag to real money expansion.