UK monetary trends suggest modest but stable economic growth. Six-month growth of real narrow money – as measured by non-financial M1 deflated by consumer prices (seasonally adjusted) – has recovered since April 2017 but remains lower than over 2013-16. Real broad money trends are similarly subdued – see first chart*.

Corporate narrow money developments are of particular interest at present: any Brexit-related cut-back in investment or shift of activity overseas should be signalled by a slowdown or contraction in real M1 holdings of private non-financial corporations (PNFCs). Growth, so far, is holding steady – second chart.

Some analysts have expressed alarm about weak household broad money trends: annual growth in household M4 fell from 6.8% to 2.9% between September 2016 and September 2017. A significant portion of this decline, however, reflects households switching out of bank and building society time deposits (including retail bonds) into investment funds and National Savings products. Retail sales of investment funds and inflows to National Savings totalled an estimated £38 billion in the 12 months to September, equivalent to 2.8% of household M4, compared with £10 billion or 0.8% in the prior 12 months.

The six-month rate of change of household real M1 – a better guide to consumer spending intentions – fell sharply in late 2016 / early 2017 but has remained positive and has recovered modestly from an April low. Household real M1 contracted ahead of consumer spending weakness in 2010-11.

The MPC was wrong to ease policy in August 2016 against a backdrop of then-strong monetary growth. Tomorrow’s expected Bank rate increase represents a partial reversal of that mistake: other elements of the easing package (i.e. the higher stock of QE and the still-expanding term funding scheme) remain in place. Current monetary trends suggest that the MPC should be cautious about signalling further rate hikes.

*Non-financial = held by households and private non-financial corporations. The M4+ measure shown in the chart includes foreign currency deposits and National Savings.

Posts earlier in the year argued, based on narrow money trends, that the global economy would lose some momentum over the summer before reaccelerating in late 2017, led by the US. This forecast is on track, although the summer slowdown was milder than expected. Current monetary trends suggest another momentum peak in early 2018.

Changes in economic momentum are reflected in activity news surprise indices calculated by Citigroup and others. The Citigroup index covering the G10 developed economies peaked in January / March 2017 at its strongest level since 2011, turned negative between June and August but has surged since mid-September. The EM index has followed a similar profile but has been less volatile – first chart.

These movements were foreshadowed by monetary trends. The shift from positive to negative surprises over the summer followed a sharp fall in global six-month real narrow money growth between August 2016 and February 2017. Recent strong economic news, meanwhile, was signalled by a rebound in real money growth into June 2017 – second chart.

The surge in the G10 surprise index since mid-September has been driven by US economic data – third chart. US economic strength is consistent with a pick-up in real narrow money growth into August, discussed in several posts over the spring and summer. A post in June argued that the US surprise index would return to positive territory by the fourth quarter, converging with or overtaking the Euroland index – this remains likely.

June appears to have marked another peak in global real narrow money growth, which edged lower in July and August before falling sharply in September. The lead time between monetary trends and the surprise indices is variable but this suggests that economic news strength will fade in early 2018. Real money growth is around the middle of its range in recent years so is not yet signalling economic weakness.