UK Economic Forecast -July 2017

17^th July 2017

Summary

Predicting the second quarter of any year is difficult because this when the ONS's seasonally adjusted figure are at greatest variance from money supply so Q2 GDP growth could be in a range of 0.1% to 0.7% but I would expect it to be at the lower end.

2017 third quarter growth in money supply 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%) or even fall to -0.2%.

Details

The second quarter figures are always difficult to predict as they are affected by the payment of corporation tax made at the end of January and as this results in a significant amount of money being taken out of the economy it has a consequential fall in associated GDP. But because this is cyclical the ONS factor it out with seasonal adjustment, a process that is not exactly clear. Therefore any prediction on Q2 is best made on comparisons with previous years. In absolute terms the percentage growth, or contraction as it actually is, is much the same as last year and on this basis we could expect growth to be at a similar level to 2016 Q2 i.e. 0.7%. However the basis of the ONS seasonal adjustment is a relative process and the Q2 figures may by impacted by the poor 2017 Q1 growth of 0.3%. This estimate also fails to take into account the effect of rising inflation that is running at 2.3%. However inflation does not seem to have impacted on the last few quarter's growth. So Q2 growth could be anywhere between 0.1% and 0.7%; a range that is too large to be meaningful.

The data 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. Clearly this prediction 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.

When the monthly contribution to the quarter's money supply is analysed then virtually all the growth can be attributed to a rallying in the amount mortgage lenders lent in May. If the trend of declining lending had continued through May then we would defiantly see a fall in GDP. That trend of falling mortgages lending ties in with the wider fall in house prices however the Nationwide housing index saw June figures buck this trend, recording a 1.1% increase. As new mortgages represent over half to two thirds of new lending it health is important to the economic future. In all probability the mortgage rally of May led to the rise in June house prices but why and is it sustainable is another matter. Whilst there has not been a significant change in the wider sentiment, and the red tags still remain in estate agent windows, the rise may be attributed to an increase in first time buyers who feel they need to get on the market while it pauses. Whether this is a blip or a reversal of the recent trend is more difficult to tell.

Another feature of the last few months has been an increase in lending to business. Since January new lending to business has been of the same order or greater than new mortgages lending. Whilst not unprecedented such a run is unusual and would normally indicate a return to health in the economy and may well account for the return to confidence in the housing market. However should the trend of declining of mortgage lending continue it will not be enough to maintain growth. On a more sober note consumer debt continues to grow, all be it at a much slower rate than either mortgages or business lending.

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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