The American Nobel Laureate economist, Robert Solow, famously said that “you can see the computer age everywhere but in the productivity statistics”. We might want to update that quote to, “you can see Brexit everywhere but in the statistics.”
UK broad money supply M4ex rose by 6.9 per cent (year-on-year) in July, up from 6.0 per cent (year-on-year) growth in June. Just as the Bank of England throws the proverbial kitchen sink at the “stuttering” UK economy, broad money is growing at its fastest rate since the recovery began. Between April and July this year, M4ex growth has accelerated from 4.1 per cent (year-on-year) to 6.9 per cent (year-on-year). The three-month annualised rate of growth in M4ex exploded to 14.7 per cent in July.
M4ex statistics point towards an economy strengthening, not weakening. But this assertion needs to be caveated. There’s no simple mechanical relationship between more cash in the bank and more spending. Money matters, but velocity matters too – i.e. the velocity of money could have shifted (broad money times velocity equals nominal GDP).
The most recent money supply figures are also striking for the sectoral differences in money holdings, between households, private non-financial corporations (PNFC) and the financial sector (non-intermediate other financial corporations). The sectoral breakdown indicates solid growth in the household and PNFC sectors, with an explosion in growth in July in the financial sector – up 70 per cent on a three-month annualised basis!
Household broad money growth was 6.7 per cent (year-on-year) in July, PNFC broad money growth was 6.1 per cent (year-on-year) and financial sector broad money growth was 9.3 per cent (year-on-year).
But even if we focus on non-financial M4ex alone, on the basis that the link between money and spending is likely to be stronger for households and companies than for the financial sector, there’s nothing in the broad money statistics to indicate the UK is heading for a recession. Quite the opposite – especially with headline inflation of just 0.6 per cent (year-on-year) suggesting most of the nominal growth could translate into real growth.
If we look at divisia measures of the money supply (weighted for transaction purposes), these also show robust growth. Household divisia money was up 10 per cent (year-on-year) in July, while PNFC divisia money was up 11.3 per cent (year-on-year).
We should be hesitant about focusing on non-financial M4ex to the exclusion of financial sector M4ex, however. The transmission mechanism from money to spending may be more direct for households and PNFCs, but this doesn’t mean there’s no transmission mechanism for the financial sector. It is more complicated, but so too is the mechanism for QE, and we don’t dismiss that.
The explosive 70 per cent annualised growth in financial sector broad money in July clearly suggests the possibility of special circumstances in this component of M4ex. One suggestion is that it is attributable to liability driven investment strategies by pension funds.
Regardless of this, the monetary statistics show two things. First, they offer reassurance about the risk of recession. Second, they provide tentative evidence that the economy might be strengthening, not weakening.
There’s little or nothing in wider economic statistics to challenge this view either. Consumption, retail sales, consumer confidence, industrial output and manufacturing are showing a strong head of steam in the second quarter, and/or a bounce-back in the latest figures. The housing market story is a little bit more mixed, but gives no cause for alarm.
Crisis, what crisis?