Diminished Money Supply in Britain Casts Shadow on Prospects for Swift Economic Recovery

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Economic

Summary:

Monetarists foresaw double-digit inflation coupled with a recession.

At the outset of 2024, the UK witnessed a continued decline in its broad measure of money supply, prompting concerns among economists regarding the possibility of a rapid recovery from the recession experienced last year.

Recent data released by the Bank of England revealed a notable decrease in the M4 money supply during the initial two months of 2024, with a 1.1% decline observed in February compared to the previous year. Notably, this decline places the UK behind both the US and the eurozone in terms of money supply rebound.

These findings are disconcerting for monetarists, who had previously forecasted a double-digit surge in inflation along with the technical recession in the UK by closely monitoring money supply trends. While mainstream economists and the central bank are cautiously optimistic about a gradual economic improvement in the UK this year, monetarists remain more guarded in their outlook.

Source: Bank Of England

In recent months, numerous mainstream economic indicators have indicated a positive trend for the UK. However, the data on money supply has remained persistently lackluster, showing only a marginal uptick from the final months of 2023.

According to Bank of England data, M4 excluding intermediate other financial corporations – a closely monitored measure of money supply – declined by 1.6% year-on-year in January and by 1.1% in February. Although these figures represent an improvement compared to the previous year's declines, February marked the eighth consecutive month of contraction.

Source: Office for National Statistics

While central bankers have downplayed the significance of money supply data, the accurate forecasts made by unconventional monetarists have sparked calls for the Bank of England (BOE) to closely monitor these figures.

Money supply experienced a notable surge shortly before inflation escalated, peaking at over 11% in late 2022. Subsequently, it sharply declined, contracting for the first time in at least 13 years, prompting recession warnings, including from former BOE Governor Mervyn King. Official data has since confirmed that the UK endured a mild technical recession in the latter half of the previous year.

Recently, BOE Chief Economist Huw Pill acknowledged the necessity of adopting a "broader approach" to forecasting, which entails examining the money supply data. A review, led by former Federal Reserve chair Ben Bernanke, on the BOE's forecasting methods is scheduled for April 12 following criticism directed at the central bank for its failure to foresee the magnitude and duration of the inflationary shock.

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