UK Economic Forecast -April 2018

11th April 2018


Q1 is nominally set to grow by 0.57% however allowing for inflation this could drop to 0.45%. However another factor to take into account; spending that would normally be made in this quarter brought forward 2017 Q4 could reduce the overall figure by 1.1% giving a contraction of approximately 0.7% or -0.7%.

2018 Q2 are in but money supply and GDP figures hold little correlation for the second quarter.


The financial activities of the three months that determine growth in Q1 are September, October and November of the preceding year. The main point of interest during this period was the very large increase in lending in September when the growth in secured lending reached a level (£10,167m) not seen since the pre-crash period, however it slumped back to volumes more typical of the last year, £2,739m in October and £4,333m in November. Business lending increased in September but contracted by an almost equal amount over the next two months resulting in a marginal increase over the quarter of 211m.

On this account money in the real economy grew by 0.57% and allowing for inflation* this will reduce by 0.1% to 0.47%. As mentioned in the summary, growth in 2017 Q4 should have contacted by 0.84% and with the allowance for inflation this would have brought it down to approximately -1.0% though official growth stands at 0.4%, 1.4% greater than that predicted. The boom in September secured lending would normally materialise in January spending so it is quite likely that some of this would have been brought forward. It doesn't happen every year but it is relatively common for years where the last quarter's GDP is greater than that predicted, by money in the real economy, then the first quarter of the next year falls by almost the corresponding amount. This would have appeared to have happened in the years 2014/15 and 2015/16. Interestingly total consumer lending contracted in January 2018 as it did in January 2015, all be it on relatively weak growth in the previous months, suggesting that the low figure is highly likely. If this contraction is correct then in all likelihood it will be attributed to the collapse of Carillion and the poor weather in March rather than the change in the money supply.

For Q2 the money in the real economy is set to contract by 0.5%. However such contractions are a regular feature of the second quarter. The contraction will be recognised in the NSO dataset BKTL which measures 'Gross Domestic Product at market prices' i.e. actual spending before inflation is accounted for. This regular contraction is removed from the headline rate of GDP by the process of seasonally adjustment to give the trend. Why there is a regular contraction is due to 4 month lag from end of year taxes being paid at the end of January. Currently I am unable to find a reliable correlation between change of money in the real economy and the headline growth rate. However there are some interesting trends in the raw data. Net lending increases for mortgages were £2,847m in December, £1,781 in January and £990 in February which is relatively low for comparable periods in recent years. The winters of 2014 and 2015 were the last time the increase in secured lending was so low. Interestingly these 2017/18 values are almost identical to the same months of 2008/9. Whether this has any bearing is another matter.

*From analysing recent trends growth does not decrease exactly by the official RPI or CPI rates, rather it is approximately a half of these rates suggesting a degree of substitution or price awareness is taking place.


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-April 2018


Money in the real economy  and GDP with loans-April 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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