UK Economic Forecast -September 2016
5th September 2016
Based on the balance of money in the real economy including the value of new loans the UK's 2016 Q3, growth as measured by the ONS dataset IHYN (Seasonally adjusted current prices) is forecasted to be 0.67%. With 2 months of monetary data in, growth for Q4 looks like it will be around 0.5%. As in the past this is a result of the continuing strength of secured lending to individuals or put another way the apparently unstoppable housing market. Although it has been accompanied also been a modest upturn in business lending.
However when the values of the new loans are stripped out the volume of money has shrunk by 0.1% for the period that corresponds with Q3 and likewise for Q4 it will shrink by 0.4%. This apparent contradiction is down to improved revenue collection by the government or a greater tax take. Whilst balancing the books is generally considered a good thing the result now is to shrink the real economy such that any growth that is being generated now is purely on the back of borrowed money rather than that created by interest. There will be some that will argue that the money the government repays will return to the private sector which is true but rather than returning to the real economy where it will support GDP it will probably be lost within corporate bank sheets of the asset part of the economy.
For the same reason this improved revenue collection is also impacting on underlining inflation in the real economy. The August figure stands at -0.42% and whilst this may be result of a higher number companies paying their yearly corporation tax it is in line with the annual trend that now reached -1.02%. Underlining inflation is the measure of interest generated from loans on existing property over the sum of real money in the economy. This deflationary pressure will probably impact on the overall inflation rate by offset that caused by the lower value of the pound.
These forecasts for UK growth are made on the basis of changes in the amount of money within the real economy. This is further explained in my book An Interesting Theory and elsewhere on this website. These show more than a casual link between the changes in GDP before inflation is taken into account and the change in money that is entering or leaving the real economy in the preceding three to four months. The premise is a simple monetary one, that an increase or decrease in money will lead to a respective change in economic activity. By real economy I mean that that is used to buy goods and services and this excludes money used in the capital and that saved away. The changes that drive the amount of money in the real economy are principally determined by three factors; interest created money which is a function of lending interest rates, the difference between government revenue and expenditure; and the change in the amount of savings.
This relationship between money and growth is shown in graphs below which are based on data from the Bank of England and Office of National Statistics. The graphs show the calculated money in the real economy delayed by four months and two forms of GDP, both changes in current prices but one has been seasonally adjusted and the other has not. What is interesting that whilst money in the real economy follows neither completely there are correlations. Firstly it picks up the annual drop in GDP during the second quarter in the not seasonally adjusted set of figures and for the rest of the year it relates quite well with the seasonally adjusted figures. Of course changes in GDP measured in current prices do not take into account inflation but by its nature nor does the change in the money supply.
GDP as measured by current prices can only be a partial view of the economy as it excludes changes in productivity and other factors but it takes on a more importance in a post-industrial economy where the service sector is dominant and productivity is falling. For me this is compelling evidence of the link between the growth GDP and changes in the money supply. There are discrepancies and this is shown when the value of new lending is added to the formula as shown in the two graphs where they both follow the GDP at different times. There are further anomies that will require further investigation chief of which is how can calculated sums follow both the seasonally adjusted set and the not seasonally adjusted set.
There has been no change to process since the last prediction. Bank of England and ONS data sets used include IUMCCTL, LPMB8DD, IUMBX67, LPMB8DE, CFMHSDC, LPMB6NN, IUMTLMV, LPMB8DF, CFMHSDC, LPMB9Y2, LPMVVIJ, LPMVVID, LPMAUYM, from the Bank of England and BKTL, YBHA, MF6U, MF6R, LISB, MS62, N445 from the ONS.
The purpose of this forecast is to provide a confident validation for the theory developed in 'An Interesting Idea'. Not that I would expect anyone to use these predictions however the information contained in this website is for general information purposes only. Any reliance you place on such information is therefore strictly at your own risk. In no event will we be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from loss of data or profits arising out of, or in connection with, the use of this website.
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