UK Economic Forecast -August 2017

10th August 2017


2017 third quarter money supply growth is set to increase by 0.6%. With quarterly inflation running at between 0.6% and 0.8% we can expect GDP in this quarter to stagnate (-0.01%).

An almost doubling of new secured lending in June will give a fillip to growth in October but falling mortgage lending is unlikely maintain this growth for the rest of the last quarter.


The full results are in for the months that contribute to Q3 growth are in and they show that the amount of money in the real economy increased for this period by 0.6% which should see ONS dataset IHYN (seasonally adjusted current prices) also increase by 0.6%. However as this is equal to or less than current and expected quarterly inflation one can expect GDP to stagnate or even fall. When predicted inflation is taken into account it stands at -0.01%, zero growth. Clearly this forecast only takes into account the fiscal element of growth and that taken by improved production is left out however with falling productivity in the UK economy this is unlikely to change the figure significantly.

In the July forecast I commented on the 1.1% increase in house prices, after a number of months where it has fallen. This coincided with almost a doubling in new secured lending; £3,959m addition lending in May and £6,701m in June. The 1.1% growth comes from the Nationwide House Price Index and for July this index has a 0.3% month on month increase which suggests that the housing market still has some oomph in it. Despite this increase I remain relatively negative on the housing market and the economy in general as the step movement between prices and increased lending of recent months suggests that house prices are still more reliant on mortgage lending than on cash buyers, as was the case in preceding years. If this is true then future growth will be dependent on other factors within the economy rather than just sentiment regarding the property market that has been a dominated influence for so long.

Regardless of where the housing market is, that doubling of new secured lending has contributed to a 1.25% increase in the money supply, on a quarterly basis, for June and when predicted inflation is taken into account October with see about 0.6% growth, again on a quarterly basis. This gives a reasonable start for the last quarter of 2017 but the 0.3% increase in July's house prices suggests that mortgages lending may have fallen back which will in turn impact on the November growth.

Of the other two areas of interest in the financial data, business lending grew at a robust 0.57% in June and consumer credit including credit card also grew by 0.19%. This latter figure is a fall on May's 0.75% increase but nothing can really be read into this as consumer debt changes quite erratically. Despite the concerns raised of growing consumer debt, as a proportion of overall lending it has stabilised over the last few months around 7.6% of the total. That it is stable within the picture as a whole it still means that individual debt may be increasing but this is probably manageable when compared to pre-crash levels of 10%-12%. With wage growth now lower than then may change the dynamic but ultimately it comes down to how easy is the debt to maintain, and with an increasing number of card providers offering 0% interest on transfers and purchases consumer debt is unlikely to trigger a banking or economic crisis by itself. That is not to say that in a downturn it will not compound the effects; as with the last crash, lending defaults and lower profits throughout the banking system will see these 0% deals quickly dry up leaving individuals to pay more.


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-August 2017


Money in the real economy  and GDP with loans-August 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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