Why the post-Brexit economic doom and gloom may have been greatly overdone
Something quite remarkable happened in the UK economy in June. UK broad money growth M4ex rose 5.8 per cent (year-on-year) – its fastest rate since the introduction of quantitative easing in 2009. Indeed, the growth rate is approaching the 6 per cent baseline for broad money growth that the Bank of England announced was its target when QE was introduced. The three-month annualised rate of growth was stronger still, at a robust 8 per cent in June.
So we have the irony that, 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.
Broad money growth suggests a pick-up in nominal GDP growth, and headline inflation of just 0.5 per cent (year-on-year) suggests that most of the nominal growth will translate into real growth.
Of course, these economic relationships aren’t precise. They depend on more than one month’s data and the velocity of money could have shifted as well (broad money times velocity equals nominal GDP). But they are a signal which suggests that the economic doom and gloom post-Brexit may have been overdone.
The referendum took place on 23 June and so July’s M4ex figures will provide a clearer picture. But the June figures do offer an interesting potential example of Groundhog Day. The March 1981 Budget led to the famous letter to The Times, by 364 economists, suggesting the economy was likely to take a nasty downward turn. We now know, of course, that the ink was barely dry on the letter when economic recovery began. Past performance is not necessarily a guide to the future, but it shouldn’t be ignored either. The consensus can be wrong, very wrong.
The Groundhog Day significance of the latest M4ex numbers is that they may be pointing towards an upturn in the UK economy, at the very time everybody is expecting a downturn.
Despite impressions to the contrary, wider economic data doesn’t entirely support the idea of a downturn either. Yes, the July Markit PMI survey and REC employment survey showed their fastest falls since 2009, but other reports are more upbeat. The Reed Job Index was up 8 per cent (year-on-year) in July. British Retail Consortium and Visa data show a pick-up in spending in July, suggesting consumer expectations haven’t been hit too badly.
Moreover the 16 per cent fall in the value of the pound against the dollar and the euro over the past year (from $1.56 to $1.30 and €1.40 to €1.17) should boost exports or the profit margins of exporters (notwithstanding the reverse effect on importers). Travel figures show flight bookings to the UK were up 7 per cent in the four weeks after the referendum.
It’s too early to be sure whether the latest M4ex numbers will tally with an upturn or a downturn, but at the very least they suggest a more measured assessment of the economic impact of the referendum is required. The Bank of England’s latest expansion in QE (by £60bn, from £375bn to £435bn) will also help boost the money supply.
July’s M4ex numbers will be very significant. If they maintain a 6 per cent (year-on-year) growth rate (still an if, not a when), this will challenge the prevailing view that we have embarked on another leg of the monetary easing cycle that began seven years ago. Combined with the impact on inflation from a weaker pound, we might then be talking about the next move in interest rates being up, not down to 0.1 per cent or 0.05 per cent. Six per cent growth in broad money certainly rules out negative interest rates.