UK Economic Forecast -September 2017

8th September 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%).

Q4 growth goes into negative territory following a fall in July's business lending.


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 GDP stands at -0.01%, zero growth. Clearly this forecast only takes into account the fiscal element of growth and that provided by improved production is left out. Typically the falling productivity in the UK has minimised this but the improvements within manufacturing for August may impacted on the overall figure.

Onto 2017 Q4, with the data in on two months of three. June's bounce in secured lending looked like Q4 was going to buck the general mood music on the economy but in July secured lending grew by less than half of that, at £2,964m. In itself this increase of money (0.18% increase of money in the real economy) will probably be just enough to counter current levels of inflation, leading to a stagnation of GDP for the month of November. However whilst mortgage lending has been the principal driver of the economy over recent years the more significant numbers for July is a £32.5 billion, or 9%, fall in new business lending. Which represents an almost 2% cut to money in the real economy. When other factors such as the balance of tax and government spending are combined with the lacklustre growth of mortgage lending and the fall in business lending and money in the real economy has shrunk by 1.4% for July. If the current levels of inflation are allowed for then GDP for the three months leading to November will stand at minus 0.8%.

The full figures for Q4 GDP will have to wait until the Bank of England release the August data at the end of this month however as already stated, with mortgage lending making up a significant part of lending, the house price indexes can hint at where borrowing and therefore the general economy is going. On this basis the Nationwide housing index registered a 0.1% fall in house prices for August suggesting that new mortgage lending will be at best on a par with July and once the current levels of inflation are taken into account the new money will equate with inflation. Notwithstanding another fall or rise in business lending or productivity improvements Q4 GDP is set for a 0.75% fall.


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-September 2017


Money in the real economy  and GDP with loans-September 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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