UK Economic Forecast -November 2016
4th November 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 0.92%. With only one month of figures in it is too early to predict 2017 Q1 growth but this data shows the rolling quarterly growth of 0.43%. As in previous months the same trend are at play. Lending continues to grow with property making up over two third of the total and there seems to be no slowdown in the banks appetite to lending in this sector. The growth in business lending also continues. However as the fall in the rolling quarterly figures indicate the volume money in the real economy is falling and this is due to the fall interest rates, mainly mortgages that have fallen from an average of 4.5% to 4.25%, over the last 2 months. Business lending rates have also seen a fall. In previous months I have attributed some of the contractions in the economy to the government increasing it tax take whilst its spending stagnates. This now seems to be less of an issue now as the ratio between spending and revenue has stabilised recently. Another factor in the contraction, which I may have looked recently, is the steady increase in commercial and domestic savings.
The frigidity of the economy is highlighted by yet another month where the value of growth is solely down to loans. If the value of loans are stripped away the economy in September would have contracted by 0.55%. The forces of contraction are so great that underlying inflation on an annualised basis now stands at -1.33%.
I also need to make a correction. I incorrectly stated that credit card lending stood at 12.08 % of the total; in fact it is 3.12% and it had risen from 3.10% where it has returned to in September. Rather than the striking rise as I had noted it has remained fairly consistent at this level for the last 2 years and is long way short of the levels seen in the mid Noughties.
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.
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.comments powered by Disqus