UK GDP grew by a slightly firmer than expected 1.4% in 2019 as a whole but the expenditure breakdown gives little cause for celebration. The increase was consumption-driven, with private investment and net exports flatlining – see table. 

Government consumption grew at the fastest pace since 2005 and was responsible, in an accounting sense, for half of overall GDP growth. Market sector gross value added rose by only 1.1% in 2019, with four-quarter growth falling to 0.6% in Q4.

Business fixed investment increased marginally but remained below its 2017 level. The chart compares trends in the UK and G7 business investment shares of GDP, measured at constant prices, since 2005. UK investment fell more in the 2008-09 recession but the gap had closed by the time of the EU referendum in 2016 (partly reflecting temporary weakness in US energy investment due to the 2014-15 oil price collapse). The UK share has since underperformed by 8%.

Previous posts discussed a simple rule for assessing GDP growth prospects for the coming year, involving comparing December levels of share prices (of domestically-orientated companies) and annual real broad money growth with 12 months before. When both were higher, GDP growth in the following calendar year was usually solid (average = 3.9% in 16 years since 1965). It was usually weak when both were lower (average = 0.3% in 11 years).

The rule gave a negative signal for 2019 but is positive for 2020. The judgement here is that it will prove wrong on this occasion. Share prices – as measured by the FTSE local UK index – recovered from an oversold level in December 2018 but were still lower at end-2019 than in December 2017. The rise in real broad money growth between December 2018 and December 2019, meanwhile, was partly inflation-driven – nominal money growth remains weak and, like share prices, was lower in December 2019 than two years before.

The OECD’s leading indicators continued to recover in December but the signal should be discounted. The recent pick-up is consistent with a rise in global real narrow money growth into September but a subsequent monetary relapse suggested that that the indicators would lose momentum from early 2020. The coronavirus shock will advance and magnify weakness.

The OECD presents its leading indicators in ratio-to-trend form, i.e. a rise (fall) indicates future economic growth above (below) trend. The G7 indicator rose for a third month in December while the Chinese indicator has been increasing (prematurely) since early 2019 – see first chart.

The approach here is to generate a “global” leading indicator of the level of output by combining the OECD data for the G7 and seven large emerging economies and “adding back” trend growth. The second chart compares the six-month rate of change of this indicator with rates of change of industrial output and real narrow money.

Rate of change turning points in the leading indicator have led those in industrial output by four to five months on average compared with a nine-month lead for real narrow money. Real money, therefore, typically leads the leading indicator by four to five months.

Real money growth rose from a low in November 2018 to a high in September 2019, falling back into December. This suggested that leading indicator momentum would bottom in March-April 2019 and rise through January-February 2020, relapsing into Q2. The low occurred slightly earlier than expected in February 2019, i.e. the real money lead on the leading indicator was three months on this occasion.

The next set of OECD leading indicator data, for January, will incorporate February business survey results, which are likely to be hit hard by the coronavirus shock. The six-month change in the global indicator, incorporating revisions, may turn out to have peaked in December or January.

A preliminary estimate of global real narrow money growth in January will be available later this week. Early indications are unfavourable: weekly US narrow money data through 27 January suggest a further fall in six-month growth – third chart – while the inflation drag on Chinese real money increased as food prices continued to surge.