UK Economic Forecast -October 2016

4^th October 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 the relevant months of data in, the growth for Q4 now looks like it will now be 0.9%. The trends of the last few months are still in play. Lending continues to grow with property making up over two third of the total. The growth in business lending also continues. However there is one small change of note and that is credit card lending as proportion of the whole has jumped by half a percent from August's near average value of 11.56%, over recent years, to 12.08%. Credit card lending hasn't been this high since 2010-11 when the economy was last stressed. It could be due to a number of reasons, the return of zero rate transfers or the result of increased holiday spending, there again it could suggest a rise in those using cards to make ends meet. Whatever this is a set of figures that are worth watching.

A hidden trend of note is the shrinking economy; if the value of new loans is removed from the equation the economy would actually be contracting by approximately 0.4% a month. In historical terms this is unusual but has been a feature of the figures for the last 10 months. The cause is fairly obvious; the contraction in government spending, or put another way drawing down the deficit is shrinking the real economy. The government collecting more and spending less has manifested itself in another trend that of deflation, on an annualised basis underlining inflation stood at minus 1.1% in August.

Whilst this may seem to be an academic point as the economy grows wherever the money comes from it probably does indicate there is stress with the economy that may explain some of the troubles on the high street.

Background

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 for 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.

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Process

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.

Disclaimer

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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