UK Economic Forecast -October 2017

14th October 2017


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 (-0.01%).

Q4 growth is set to go into negative territory with money supply contacting by 0.78%. Allowing for the same rate of inflation as Q3 we can expect quarterly GDP to contract by 1.40%.


Q3 growth is as previous predictions; 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 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.

For Q4, the economic data for the three months are now in and it has been a little bit of a roller coaster. June saw a doubling of new secured lending to £6,704m and it looked like the quarter was going to defy the dark clouds that have surrounded the economy but July's mortgage lending had returned to its earlier subdued levels (£2,964m) of recent months. More importantly for that month, business lending collapsed by 9% or £32.5 billion which represents a 2% reduction of money in the real economy. The August figures are a little bit of a mixed bag; secured lending was almost up by the same amount in June (£5,063m) but the contraction in business lending continued, all be it not quite at the same rate (down £899m). The net result over these three months is a decline of £19,390m of money in the real economy. From the theory explained elsewhere on this web site this will lead to a contraction in GDP as measured by seasonally adjusted current prices (IHYN) of -0.78%. Once quarterly inflation of 0.6% is taken into account the headline rate of GDP will be in the vicinity of -1.4%. One of the interesting points to note is the correlation between increased mortgage lending and higher prices, so that June's increase in secured lending coincided with a 1.1% rise in the Nationwide's monthly change housing index, whereas July lending saw only a 0.2% rise. Surprisingly the Nationwide's monthly index for August saw a -0.1% decline when the lending figures would suggest otherwise. Should anything be read into this? It is probably too early to say but it would appear that the power of rising house prices to drive the economy in the absence of any other economic activity is starting to wane.


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-October 2017


Money in the real economy  and GDP with loans-October 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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