UK Economic Forecast -March 2017

9th March 2017

Based on the balance of money in the real economy including the value of new loans the UK's 2017 Q1, growth as measured by the ONS dataset IHYN (seasonally adjusted current prices) is forecasted to be 0.33%. This is a slight improvement on last month's prediction however if inflation is accounted for the headline rate (IHYQ) will fall to at least zero and probably lower to the order of -0.2%. Q2 GDP figures are always difficult to predict as they are distorted by the payment of corporation tax in January and then seasonal adjustment. This a aside the monetary data figures for the first two months are weak and trending down but when the January figures are compared with those of a year ago they are similar and for this quarter only, comparison with previous second quarters is the best indicator, so this basis IHYN will be 1.60% and IHYQ will be 0.6% but this could fall to another near zero figure once inflation is taken into account.

Lending continues to grow, property making up the bulk, but secured lending increased by half that of the increases during the summer months. At one level this is nothing to worry about as this is in line with January's of recent years. On the other hand it is part of a trend of declining lending. What is of interest is the fall in this lending is more than compensated by rises in lending to both financial and non-financial corporations. Could this be speculation on a booming stock markets?


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.

Money in the real economy and GDP without loans-January 2017


Money in the real economy  and GDP with loans-January 2017


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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