UK monetary trends remained solid in the immediate aftermath of the Brexit vote but November numbers released today were weak, suggesting deteriorating economic prospects for mid-2017, allowing for an average nine-month lead from money to activity.
The preferred narrow and broad money measures here are non-financial M1 / M4, comprising holdings of households and private non-financial corporations (PNFCs). Both aggregates grew by only 0.1% in November – the weakest monthly changes since 2011-12.
Annual growth of non-financial M1 fell to 9.4% in November, a five-month low and down from a September peak of 10.2%. Annual non-financial M4 growth retreated to 5.7%, the lowest since December 2015, having reached 6.8% in September.
Economic growth prospects are related to real (i.e. inflation-adjusted) monetary trends. The first chart shows six-month rates of change of non-financial M1 / M4 deflated by consumer prices (seasonally adjusted). The nominal money slowdown has been compounded by accelerating consumer prices, which rose at a 1.9% annualised pace in the six months to November. Six-month real narrow money growth is at a 14-month low, with real broad money expansion the weakest since August 2014.
As the chart shows, faster real money growth in 2015 / early 2016 was reflected in a pick-up in two-quarter GDP momentum through the third quarter of 2016. Real money trends remained solid until autumn 2016, suggesting that economic strength will be sustained until spring 2017. The November numbers, however, hint at a sharp slowdown over the summer.
Monthly monetary statistics can be volatile so it is probably advisable to wait for December data before concluding that the economic outlook is darkening.
The recent fall in six-month real non-financial M1 growth reflects fading strength in the household component, which correctly signalled consumer spending strength before and after the Brexit vote but now suggests rising caution – second chart. Corporate narrow money trends, by contrast, remain stable and solid, possibly indicating that Brexit worries have so far been neutralised by a better-than-expected economic environment.
The narrow money numbers have probably been slightly depressed recently by a switch of funds out of bank deposits into National Savings products – particularly instant-access income bonds, yielding a competitive 1.0%. National Savings inflows totalled £2.2 billion in November, equivalent to 0.2% of non-financial M1.