UK Economic Forecast -January 2018

13th January 2018


Q4 growth is set to go into negative territory with money supply for the real economy contacting by 0.78%. Allowing for a similar inflation affect as that for Q3 we can expect quarterly GDP to contract by 1.0%.

2018 Q1 growth will pick up slightly following an expansion of the money in the real economy of 0.37%. Once inflation is accounted for this will translate into neither growth nor contraction, i.e. a GDP change of 0%.


The economic data for the three months that determine the economic back drop for Q4 have 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 general dark clouds of the economy but in July mortgage lending had returned to the more subdued levels (£2,964m) of recent months. More importantly for that month, business lending collapsed by 9% or £32.2 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 (£5,131m) but the contraction in business lending continued, all be it not quite at the same rate (down £685m). The net result over these three months has been 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%. This is before inflation, if the quarterly rate of 0.6% is factored in the headline rate of GDP (IHYQ) will be in the vicinity of -1.4% however passed data suggests that it is not a simple substitution. For the last quarter the difference between actual growth and that predicted by the increase of the money supply was approximately 50% of the inflation rate and on this basis we can expect headline GDP to contract by 1.0%. There is another variant that may need to be accounted for and this can be found in data that would normally make up 2018 Q1 figures. A sharp rise in lending on property in September would normally manifest itself in the first quarter of the new year but given that the last quarter of 2017 will be/has been subdued and Christmas being Christmas there may be those who bring forward their spending; probably by borrowing.

For the months that contribute to the economic performance of the first quarter of 2018 property lending continued the roller coaster through the months of September, October and November. The rate of new secured lending doubled in September to £10,246m from what was already a close to the highs of recent times in August. In October it slumped to a quarter of this at £2,597m before rising to a respectable £4,272m in November. This jump in new lending for September is quite incredible but when taken as part of a yearly total it is not much different to past years. It is almost as if after months of low lending, lenders targets had to be met. Another point of note is that this amount of new lending has only been surpassed once, in October 2007 a point in time that marked the beginning of the financial crisis. It was also at a time when such lending was easier to make as interest rates were at much higher levels generating a lot more new money.

New lending business has also been a bit of a roller coaster. September lending increased by £4,672, a return to levels before that 9.0% contraction in July but this appears to have been a blip as in October total lending contracted by £2,592m and this trend continued in November down by a further £2,685m The net result of this lending will see the volume of new money in the real economy increase by 0.37% and making allowances for inflation as described above GDP will stagnate around the zero percent.


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 2018


Money in the real economy  and GDP with loans-January 2018


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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