UK Economic Forecast -March 2016
10th March 2016
As I make clear in my book An Interesting Theory and elsewhere on this web site there is more than a causal link between the money supply and growth but the trying to match this with seasonally adjust headline figure is a little more difficult. I have made no more progress in getting the two to match since my last forecast and will try to make this one on the money figures alone. This link is shown in the attached graphs that show GDP and the amount of money in the real economy.
As we can see the general trend is in decline for both growth and money in the real economy. For the last quarter of 2015 I forecast that the rate of growth would fall to below 0.25% but the official figure put it at zero. In trying to analysis the reasons for such a large fall we need to look what was happening with money 3 to 4 months earlier. Firstly interest created money saw a small fall from June to August when it steadily fell from £6,395m in May to £6,292m in August which was a result of falling interest rates rather than a decline in lending. This was countered by a slowing in the rate of saving but this still accounted for £15,217m being taken out of the economy. The impact of government was neutral as there was no change in the ratio of spending over revenue for the overall period. These changes resulted in the money in the real economy growing by 0.34% or 0.51% if the value of new loans is included.
So what does the same data sets tell us for growth in the first quarter of 2016? For the period that included September, October and November interest created money steadily rose; from £6,292m in August to £6,406m in November. But this was accompanied by increase in saving of £ 33,211m resulting in over £14,000m being taken out of the real economy. However there was a small positive effect from government spending for this period. Overall the money in the real economy increased by 0.01% or 0.84% if the amount lent is also included. This compares with 0.34% and 0.51% respectively for the previous period. As there is discrepancy in the direction of the amount of money in the real economy if loans are included, or if they are not there is a difficulty in deciding how growth will perform in this first quarter. Whilst it could easily go up from the zero I will predict that in line with the general trend growth will continue to fall. While the figures for the first quarter maybe difficult to read the early indications for those for the second quarter, December and January, are shouting negative growth.
Lending on mortgages in January 2016 represented 68.17% which is unchanged on the previous month and seems to have plateaued out.The importance of this figure is explained here.
Based on the proportion of interest created money from mortgage lending underlying inflation lies at -0.14% a year, continuing the steady decline but is not manifesting itself due to deflationary forces elsewhere in the economy, principally the fall in commodity prices and general constrictions on the money supply due to low interest rates.
The purpose of this forecast is to provide a confident validation for the theory developed in 'An Interesting Idea'. No responsibility is taken for the accuracy of this forecast.
Bank of England and ONS data sets have been used for this forecast.
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