Money supply is starting to grow again
FOR all the much-deserved carnage in Westminster yesterday, the economy is gradually recovering. This doesn’t mean we will enjoy a V-shaped bounce-back: growth, when it returns, will have to contend with massive fiscal tightening to tackle the exploding budget deficit; interest rates will also have to go up, dealing the convalescing housing market a second blow. But one thing is sure: Gordon Brown will have long since been booted out of Downing Street before voters acknowledge that the worst is over.
One improvement the City will welcome is that UK banks’ holdings of bank reserves, gilts and treasury bills, their most liquid assets and best buffer against potential problems, have shot up to their highest level since 1996. Citigroup calculates sterling liquid assets accounted for 3.4 per cent of banks’ total sterling assets in April, up from 2.8 per cent in March, 1.9 per cent in February and a scandalously low 0.2 per cent in early 2007.
An increase in the amount of money sloshing around the economy is another sign things are getting better. The more money there is, the more individuals and companies will spend on goods or assets. Most commentators yesterday focused on the simple, unadjusted M4 measure of the money supply, which didn’t look great; but a more in-depth analysis shows that there are plenty of green shoots here too.
A special, adjusted measure of M4 which excludes many of the distortions in the regular statistics shows growth of 1.0 per cent in April, which was pretty good. One of the experts in this area, Simon Ward of Henderson New Star, calculates that the adjusted money supply probably rose at a 7.8 per cent annualised rate in the first four months of 2009, up from 3.0 per cent during the second half of 2008. This is the sort of number that is compatible with slowly rising asset prices, a growing economy and modest consumer price inflation. After adjusting for retail prices, the annual rate of change has recovered from -0.7 per cent in September to 5.5 per cent. The annual change in the inflation-adjusted value of currency and sight deposits has improved from -5.8 per cent in October to 1.4 per cent in April.
So where is the action taking place? Money held in bank accounts by households and non-financial corporations grew by just 0.1 per cent in April, as both used spare cash to pay off debt; but there was a surge in the cash balances of financial institutions, excluding volatile intermediaries, reflecting the direct and indirect impact of quantitative easing.
There was a 0.1 per cent drop in bank and building society lending to households and non-financial corporations – the first monthly fall since 1993, which at first sight might suggest that the credit crunch is still with us. Not so: the reduction was clearly demand-led, not supply-led. Lending to households slowed to £2.2bn, despite increased mortgage borrowing, which was more than cancelled out by the fact that corporations repaid £4.7bn of bank debt, reducing the overall figures. Part of the reason for this welcome deleveraging was the healthy proceeds of recent capital raisings, with sterling issuance of £13.7bn in the three months to April.
There are still horrendous problems facing the economy – but at least the technical credit crunch and monetary squeeze are over. And for small mercies we should all be grateful.