Embed Size (px)
Citation preview
[ The Institute of International Monetary Research is a research institute with charitable status. This note is being e-mailed
to people and organizations interested in global money trends, and the relationships between money and banking on the one hand and macroeconomic outcomes on the other. It is not business or investment advice, and the Institute accepts no
responsibility for decisions taken in the light of the analysis given. ]
Monthly e-mail from Tim Congdon and John Petley – 29th May, 2018
Global money round-up in early summer 2018 As I noted here last month, in the October 2017 ‘Global money round-up’ I suggested that the then money growth slowdown foreshadowed “at best trend-growth in global demand and output in, say, the year from spring 2018.” The latest business survey results from the USA, the Eurozone and the UK confirm that the pace of expansion (in demand and output) has slipped back since late 2017. Monetary indicators have therefore proved successful as a forecasting tool. But – for the time being – forecasts of recession in any part of the world economy would be misplaced. Indeed, the money growth numbers for the USA and the Eurozone in the latest month are better (i.e., higher) than in the last few months. (See the country notes below for further discussion. In the UK money growth has fallen markedly so far in 2018.) The Fed and the ECB may want a moderation in growth from the quite buoyant conditions in late 2017. The Fed can anyhow change tack quickly if the real-economy data start to disappoint. (It also needs to be said that recent changes to the Dodd-Frank legislation may spur an upturn in mortgage credit from small, regional banks, boosting the growth rates of total bank credit and broad money. This effect will compensate for the reductions in broad money growth from the Fed’s asset sales programme.) But the situation in the Eurozone is more difficult. As the Basel III rules continue to crimp banks’ extension of credit to the private sector, the ECB’s asset purchases have been the key driver of the recovery in money growth since late 2014. But – given the obvious scorn for fiscal restraint shown by Italy’s new populist government – it is unlikely that the ECB will reconsider its announced intention to end those asset purchases in September. The annual rate of broad money growth may drop to under 2%, returning the Eurozone to the deflationary malaise seen in the 2011 – 14 period.
Money trends in spring 2018 in the main countries/jurisdictions
What are the latest money growth trends in the main countries? And what is the message for global
economic activity over the next year or so, and for inflation/deflation over the medium term
thereafter? The table below summarizes key numbers. Beneath the table I make an overall assessment.
The commentary here has since last summer become more cautious about 2018, reflecting
i. expectations that money growth would decelerate in the USA and the Eurozone, and
ii. the fulfilment of those expectations as the evidence of money growth decelerations has
arrived.
A notable feature is that the three-month annualised growth rates of broad money are lower than the
annual growth rate in all of the USA, the Eurozone and the UK. Business opinion surveys and the
latest real-side data from both the USA and the Eurozone confirm a wider growth slowdown,
affecting demand and output. The growth slowdown is likely to intensify if the Fed adheres to its
stated plan to increase the run-off of QE assets and if the ECB adheres to its announcements about
ending asset purchases in September. (Higher dollar interest rates would have the same effect.) More
helpful to the global outlook is an upturn in the growth rates of credit and money in India, but the
global effects of internal domestic policy developments in India are minor. Money growth fell back in
China in the latest month. Central banks seem more concerned to head off rising inflation than to
support trend growth of demand and output, implying negligible non-energy inflation in 2019 and a
persistence of low inflation into 2020.
Name of country/ jurisdiction
Share of world output
Growth rate of broad money
Comment
In purchasing-power parity
terms, %
In current prices and exchange rates, %
In last three months at annualised
rate, %
In last twelve months, %
USA 15.1 23.3 3.8 4.4 Easing of Dodd-Frank to boost credit expansion, but the Fed’s asset sales reduce broad money.
China 18.7 16.1 7.6 8.9 Concern about excessive debt has not stopped the PBOC easing reserve requirements..
Eurozone 10.6 16.4 2.3 3.7 Broad money growth falling back towards very low figures, deflation fears to resurface.
Japan 4.2 5.9 2.9 2.8 Credit and money growth has slowed since autumn 2018. Last two months are stronger.
India 7.7 3.3 12.3 10.7 Credit and money growth increasing, despite worries about fraud in banking system.
UK 2.2 3.4 1.0 3.8 Sharp slowdown in money growth, partly related to official demands for more bank capital.
Overall the verdict for 2018 has to be that the world economy will experience beneath-trend growth of
demand and output, with the quarter-to-quarter growth being less than in 2017. The withdrawal or
cancellation of QE operations in the two big developed-world economies (the USA and the Eurozone)
explain much of the dip in money growth, but the latest numbers from China are far from reassuring.
The money slowdowns in the USA and the Eurozone matter, and justify a view that the year from
spring 2018 will see beneath-trend growth in both areas. But a global recession is unlikely.
The Eurozone banking scene and monetary trends are unusually interesting at present. The ECB’s
asset purchases – which for a time ran at €80b. a month – have been cut to €30b. a month and, on
current plans, are due to end altogether in September. A deceleration in money growth became
evident in early 2018. The growth of money can be viewed as dependent on two influences,
i. domestic credit extension (to both the private and public sectors) from the banking
system, and
ii. external influences, as banks borrow from and lend to overseas residents, including
foreign banks, and register the consequences of residents’ transactions with foreigners.
In the 2011 – 14 period Eurozone banks – particularly those in the Eurozone periphery – had to limit
credit to the private sector, because of their allegedly inadequate levels of regulatory capital. The
growth of domestic credit – and hence of the bank deposits which constitute most of the quantity of
money – was so weak that many households and companies had inadequate money balances.
Spending was held back, which restricted imports and helped the Eurozone’s external payments.
Meanwhile low asset prices encouraged foreign purchases of equities, property and so on. So the
negative effect of weak domestic credit on money growth was to some extent offset by positive
external influences.
-400
-200
0
200
400
600
800
1000
2012 2013 2014 2015 2016 2017
The interaction between domestic credit and external influences on Eurozone money growth, 2012 - 17
Increase in non-deposit liabilities
Net external assets
Domestic credit
in b.
of €
This is obvious in the chart above. In 2013 domestic credit expansion was negative by over €330b.,
with a contraction of banks’ claims on the private sector of more than €300b. being the main
contributory factor. Banks across the Eurozone pulled in credit, as they tried to comply with the Basel
III regulatory standards. But the implied shortage of money balances was countered by money inflows
from overseas, with the external influences on M3 growth being positive by above €360b.
The pattern changed in 2014 and 2015, as the ECB embarked on the asset purchase programme
widely known as “quantitative easing”. Domestic credit expansion surged, reaching a positive figure
of over €800b. in 2016. The shortage of money balances was transformed into a much more
comfortable financial position for Eurozone private sector companies and households. Money flowed
out of the Eurozone, to the tune of a negative figure for the external influences on money growth of
about €275b. This subtraction from money growth prevented the QE stimulus being even stronger.
When the ECB’s asset purchases stop in September, domestic credit expansion will plunge back
towards the sort of figures seen in the three years, 2012 – 14. The DCE figure may stay positive, but it
is unlikely to be more than, say, €300b. That would be consistent with an annual rate of broad money
growth of at most 2%, a meagre number that would return the Eurozone economy to the troubled
period in the early 2010s when it suffered a second recession (fortunately a mild one) on top of the
Great Recession. External influences on money growth might turn round once more, so that the
growth of aggregate broad money was higher than domestic credit expansion. The influx of money
from abroad would in turn mitigate any deflationary pressures. But it needs to be emphasized that the
transfer of money balances from the rest of the world would deduct from money growth elsewhere,
including, for example, the UK. The looming crisis in the Eurozone will be have adverse implications
for global money growth and economic activity, with the stresses beginning to surface in the second
half of 2018.
Let me repeat the warning made in the April 2018 monthly report from the Institute of International
Monetary Research on this subject. At present Germany has a surplus on its government finances and
a ratio of public debt to gross domestic product of 65%, whereas Italy has a deficit of 2½% of GDP
and public-debt-to-GDP ratio of over 130%. The so-called “populist” parties (the Five Star Movement
and the Lega) have now formed a government in Italy and announced a fiscal programme that will
take the deficit over 5% of GDP, indeed, possibly to figures of 6% - 8% of GDP. If the public debt
moves out towards 150% of GDP, Italian government bond yields will rise. The threat over the
medium term would be that the higher bond yields cause a higher debt interest burden and a further
widening in the budget deficit, just as happened with Greece in 2010 and 2011. One indicator of the
lack of financial market confidence in Italian public finances is the imbalance in the Target 2
settlement system between the large German credit position and the substantial debit positions of Italy
and Spain. The imbalance has worsened in recent months, although until March 2018 the deterioration
was not marked.
A consistent theme in the commentary from the Institute of International Monetary Research is that
policy-makers have suffered since 2009 from the false belief that the Great Recession was caused by
banks “going bust”. In fact, very few banks went bust even in the Eurozone, where the peripheral
countries (Greece, Ireland, Portugal) had the economies most adversely affected by the downturn of
2008 and 2009. The Great Recession was instead caused by a collapse in the rate of growth of the
quantity of money, as explained in my contributions to the book I edited on Money in the Great
Recession which was published last year. The bank recapitalization campaign – apparently (and
amazingly) the heart of the official response to the banking problems of 2007 and 2008 – was the
main cause of the intensification of the recession from autumn 2008, but it continues to this day. The
talk is of the Basel III regulatory standard being replaced by a yet tougher Basel IV regime.
The demands for higher capital/asset ratios caused banks – particularly from 2009 to 2013 – to reduce
holdings of risk assets. This caused falls in the size of their balance sheets (i.e., so-called “de-
leveraging”) and hence to the large-scale destruction of money balances. In the Eurozone’s cases they
led to a smaller recession (with output dropping by 0.9% in 2012 and 0.2% in 2013) in the aftermath
of the Great Recession. It is astonishing that so many central bankers and regulators still bow down to
worship at the altar of higher bank capital ratios. At least there is a glimmer of light in the USA. The
Trump administration has eased the regulatory burden on small, regional banks, and – in the fullness
of time – a general trend towards lighter and more sensible regulation may become established.
29th May, 2018
USA
% annual/annualised
growth rate:
M3 Nominal GDP
1960 – 2016 7.5 6.5 Six years to 2016 4.0 3.7 Year to April 2018 4.4 n.a Three months to April 2018
at annualised rate 3.8 n.a. Sources: Shadow Government Statistics research service for M3 after 2006 and US Bureau of Economic
Analysis for GDP
-10
-5
0
5
10
15
20
Recent trends in US money growth % M3 growth rates, with M3 estimated by Shadow Government Statistics
Annual rate
Annualised rate in last three months
___________________________________________________________________________
Better M3 growth in April, but will it last?
Summary: In the three months to April 2018, US broad money grew at an annualised rate of 3.8%, up from 2.2% in the three months to March. The annual growth rate remained unchanged at 4.4%. April saw the quantity of money, broadly defined, increase by $92b., the most substantial increase since August 2017, which was before the Fed’s explicit reversal of “quantitative easing” began. (Our M3 data come from Shadow Government Statistics.)
These figures are positive for the US economy, given that April was the first month with the monthly
run-off of asset purchases was raised to $30b. Broad money growth at an annualised rate of 3.8% is
more or less ideal for stable macroeconomic growth coupled with low inflation. However, the Fed’s
monthly rate of asset run-off will increase further, to $40b. in July and $50b. in October. This will
reduce broad money growth (relative to what would otherwise have occurred), possibly by as much as
$60b.- $90b. in the fourth quarter of 2018 (i.e., at an annualised rate of $240b. - $360b.). Further rises
in the Fed funds rate, following March’s 0.25% hike, are also threatened. Today’s Fed keeps a close
eye on the unemployment rate, wage growth and inflation when contemplating a rate rise.
Unemployment fell to 3.9% in April after six months at 4.1%, which was in itself a 17-year low. The
annual consumer price inflation rate ticked up further to 2.5% in April after rising from 2.2% to 2.4%
in March. Wage growth has moderated since hitting 5.3% in December, now standing at 4.5%.
Background inflation trends will therefore encourage the Fed to continue with its monetary tightening.
By contrast, the slowdown in broad money growth will pass largely unnoticed.
“Loans and leases in bank credit” – which equate to bank lending to the private sector, in UK parlance
– continue to show growth. In the year to April the stock of such loans advanced by 4.4%. In the three
months to April the annualised rate of increase was a touch higher, at 5.1%. Mortgage credit has
recently been more sluggish than bank lending to the corporate sector. The increase in the quantity of
money has been lower in 2018 than the increase in banks’ “loans and leases”, which argues that the
Fed’s asset sales have indeed dampened money growth, just as has been proposed in these notes.
(When the issuer of a bond redeems it, it pays a balance to the holder, in this case, the Fed. If the
balance were a deposit claim on banks, the quantity of money goes down.)
Separately, the determination of US regulatory authorities to implement the Basel III rules has put
downward pressure on banks’ asset growth. But the Trump administration has withdrawn parts of the
Dodd-Frank legislation, to promote lending from small regional banks. April’s numbers were an
encouraging increase in US broad money growth, but overall the expectation must be for a further
money slowdown in the second half of 2018.
Tim Congdon and John Petley
16th May, 2018, revised 29
th May 2018
% annual growth rate:
M3 Nominal GDP
1960 – 2016 7.5 6.5 1960 – 1970 7.7 6.8 1971 – 1980 11.4 10.3 1981 – 1990 7.7 7.7 1991 - 2000 5.6 5.6 2001 - 2010 7.1 3.9 Six years to 2016 4.0 3.7
China
% annual/annualised
growth rate:
M2 Nominal GDP
1991- 2016 19.7 15.4 2010 - 2016 14.4 11.6 Year to April 2018 8.9 n/a Three months to April 2018
at annualised rate 7.6 n/a Sources: People’s Bank of China for M2 and International Monetary Research Ltd. estimates
0
5
10
15
20
25
30
35
40
45
50
Recent trends in China's money growth % growth rates in M2, data from the People's Bank of China
Annual rate
Annualised rate in last three months
At what level will China’s broad money growth settle?
Summary: In the three months to April 2018 China’s seasonally adjusted M2 grew by 1.9% or at an annual rate of 7.6%. In March the annualised quarterly growth rate stood at 10.4%. January’s figures, which reflect the new credit allocations made at the beginning of each year, have fallen out of the calculations. The unadjusted quantity of M2 money fell during April, with the annual rate of money growth standing at 9.1%. It has remained below 10% for a full year now and may well not return to double figures in the near future.
Given the degree of control exerted over the economy by the Chinese authorities, it is apparent that
the lower levels of broad money growth of the past year are not causing undue concern. Otherwise
further monetary loosening would have taken place, on top of the recent 1% reduction in the cash
reserve ratio for the country’s banks. In previous years, the authorities have set a money growth
target. But this year they have decided not to. Premier Li Keqiang stated in March that his country
will “adopt a stable and neutral monetary policy, and maintain reasonable growth of M2”. The
authorities set a 13% target for 2016, which was missed, and then a 12% target for 2017, which was
missed too. It appears that annual M2 growth of 8% - 9% will be acceptable in Beijing. An easing of
monetary policy would not result in an early return of high inflation. The government has set a 2018
target for inflation, of a 3% rise in consumer prices. But consumer prices were rising only at an annual
rate of 1.8% in the year to April. (The CPI actually fell in the month itself.) With factory gate prices
up by 3.4% in the year to April, inflationary pressures are not too bad. However, China is a major fuel
importer, so that the recent increase in the oil price will give inflation an upward nudge.
The growth in the stock of bank loans to the private sector fell slightly to 12.7% after two months at
12.8%, For over two years, loan growth has been fairly stable, remaining between 12.6% and 13.5%
throughout. The picture remains essentially that of stable growth. Figures for the first quarter of 2018
have recently been published, showing that GDP growth remains unchanged at 6.8% year-on-year.
The late 2016 boom in the Chinese housing market is over. In April, property prices recorded their
smallest annual increase, 4.7%, in over two years. The imposition a year ago of tighter lending criteria
in the most sought-after cities to dampen price growth is typical of the tight control which is exercised
over the economy. It seems to have worked, curbing price rises which briefly hit an annual rate of
39% in Shanghai. Chinese exports are also performing well, growing by 12.9% in the year to April.
The impact of the recently-imposed US tariffs on Chinese goods has proved less than feared.
In summary, the most likely macroeconomic scenario for China for the rest of 2018 is for money
growth to continue at roughly the current level. The low numbers are not helpful for the Chinese or
world economies.
John Petley
16th May, 2018
% annual growth rate:
M2 Nominal GDP
1991 - 2000 24.6 18.5 2001 - 2010 18.4 15.2 Six years to 2016 13.5 10.6
% annual/annualised
growth rate:
M3 Nominal GDP
1996 – 2016 5.3 3.0 Six years to 2016 3.4 2.0 Year to March 2018 3.7 n/a Three months to March
2018 at annualised rate 2.3 n/a
Sources: European Central Bank and International Monetary Research Ltd. estimates
Eurozone/Euroland
-10
-5
0
5
10
15
20
Recent trends in Eurozone money growth % M3 growth rates, data from the European Central Bank
Annual rate
Annualised rate in last three months
Money growth slowdown continues: trouble ahead
Summary: The first quarter of 2018 saw M3 growing in the Eurozone at an annualised rate of 2.3%. This is an improvement on the 1.6% growth rate in the three months to February, which was the lowest figure since May 2014. But 2.3% was still well below 2017’s average of 4.7%. The quantity of money grew by €30b. during March itself, which was much higher than the paltry €2b. growth of February. The annual M3 growth rate declined further. February’s figure of 4.2% was the first time in over three years in which it has deviated from a narrow band of between 4.4% and 5.3%. But in March it fell lower still, to 3.7%. German M3 growth remains sluggish and well below the Eurozone average.
Broad money growth picked up in March, but mainly because the Eurozone pulled in money balances
from the rest of the world. The current weakness in the Eurozone economy will be exacerbated if the
ECB does not change its stated plan to end the “quantitative easing” programme in September. At the
beginning of 2018 the monthly asset purchases were scaled back from €60b. to €30b. The latest ECB
Economic Bulletin (dated 10th May) kept open the option to extend the programme beyond September,
especially if the asset purchases were viewed as essential to boost inflation to the ECB’s target of “2% or
just under”. After rising to 1.3% in the year to March, consumer price inflation fell back to 1.2% in
April. The ECB expects the increase in the oil price to lift inflation to 1.5% in coming months, but sees
no sign of any other sustained inflationary pressures. Across the 19-member bloc inflation rates remain
divergent. Greece and Cyprus are still battling with deflation while Estonia’s annual inflation rate ticked
up from 2.8% in March to 2.9% a month later.
Of course, the creation of the Eurozone was meant to lead to closer alignment of the economies of the
member states. Senior politicians and ECB staff periodically call for measures to increase economic
integration. On 11th May Mario Draghi, president of the ECB, called for a single European deposit
insurance scheme and a publicly-funded “backstop” for the Eurozone’s single bank resolution fund.
Germany, as always, has expressed its opposition to these proposals. A far bigger problem for the
Eurozone is likely to be the new Italian government, a coalition between the anti-establishment Five Star
Movement and the Eurosceptic Lega. Both parties have expressed strong opposition to the fiscal
restraints imposed upon them as Eurozone members.
Across the bloc as a whole, growth in the stock of bank lending remains modest. Here too, however,
there are hints of a further slowdown. The annual growth in mortgage lending stood at 3.0% in March
after growing at up to 3.5% in the latter half of 2017. Bank lending to business rose by 2.2% in the year
to March. Unemployment remains unchanged at 8.5%, the lowest in nearly a decade. The Eurozone
economy has lost steam in 2018. Some peripheral economies are vulnerable to an intensifying downturn
if the ECB’s asset purchase programme is terminated, and its positive effects on asset prices and balance
sheets fade. Intensifying demand weakness is to be envisaged in late 2018 and a recession in 2019 might
be seen, if broad money growth comes to a complete halt.
Tim Congdon and John Petley
15th May, 2018, revised 29
th May 2018
% annual growth rate: M3 Nominal GDP
1996 - 2016 5.3 3.0 1996 – 2000 4.6 4.1 2001 – 2010 6.8 3.1 Six years to 2016 3.4 2.0
Japan
% annual/annualised
growth rate:
M3 Nominal GDP
1981- 2016 4.0 1.9 Six years to 2016 2.9 0.6 Year to April 2018 2.8 n/a Three months to April
2018 at annualised rate 2.9 n/a Sources: Bank of Japan for M3 and IMF for GDP
-4
-2
0
2
4
6
8
10
Recent trends in Japanese money growth% M3 growth rates, data from Bank of Japan
Annual rate
Annualised rate in last three months
_____________________________________________________________________
Broad money growth up for second month
Summary: In the three months to April 2018, Japanese M3 broad money grew at an annualised rate of 2.9%. This is an improvement on the first three months of the year, where annualised quarterly growth sank below 2%. The seasonally adjusted quantity of money, broadly defined, grew in April at its fastest rate in over a year. At the end of 2017 M3 growth slowed due to a dip in banks’ extension of credit to the private sector. The slowdown in bank credit extension seems to have come to an end, a positive backdrop to future money growth. The annual M3 growth rate ticked up from 2.6% to 2.8%, still below the figures for 2017, which were consistently within a range of 3.2% - 3.6%.
In the year to April, lending by Japanese banks grew by 2.1% year-on-year, an increase on March’s
figure. Growth in the stock of bank lending had been falling every month from July 2017, when it
stood at 3.3%, to March of this year, by which time it had dropped to 2%. It is too early to say
whether or not the slowdown has ended, given there was no obvious reason why banks should have
dampened their pace of credit extension in the closing months of 2017. The housing market is
slowing, which may been a factor. Housing starts have been declining since July and the annual
decline rate fell to 13.2% in January. After recovering 2.6% in February, a further sharp drop of 8.3%
in housing starts compared with a year previously was recorded in March. A country with Japan’s
demographics is unlikely to see much growth in its housing sector, but a sudden drop of this
magnitude is surely cyclical rather than due primarily to the declining population.
Annual consumer price inflation dropped back to 0.6% in April. It had reached 1.5% in the year to
February, which was the highest figure since March 2015. Nevertheless, this was still below the
government’s 2% target, which is unlikely to be reached in the near future. Indeed, in April the Bank
of Japan abandoned setting a timeframe for hitting the target, having previously missed all its
previous targets. The country’s dependence on energy imports should ensure that, with oil prices
strengthening, an early drop in consumer prices is highly unlikely. Wage growth rose from 1.0% in
the year to February to 2.1% a month later. This is the highest figure for at least four years. But there
is no guarantee that the Bank of Japan’s hopes of sustained wage growth (and thus higher inflation)
driven by the tight labour market will necessarily be fulfilled. Japan’s unemployment rate has been
falling steadily since 2009 without thus far significantly pushing up wages. The yen has weakened
against the US dollar in the last two months, but all these factors are unlikely to generate the sustained
upward inflationary sought by the central bank. The growth in factory-gate prices is slowing and retail
sales are sluggish.
With no sign of a winding-up of the BoJ’s ultra-loose monetary-policy settings, the most likely
macroeconomic scenario is a continuation of steady but low growth. In the first quarter of 2018, the
Japanese economy grew by 0.9% compared with 12 months earlier. Similar low but positive GDP
growth rates are likely to be maintained if broad money growth does not fall again.
John Petley
17th May, 2018
% annual growth rate:
M3 Nominal GDP
1981 – 1990 9.2 4.6 1991 - 2000 2.5 1.1 2001 - 2010 1.1 0.8 Six years to 2016 2.9 0.6
India
% annual/annualised
growth rate:
M3 Nominal GDP
1991- 2016 16.1 13.5 2010 - 2016 12.6 12.8 Year to April 2018 10.3 n/a Three months to April 2018
at annualised rate 12.3 n/a Sources: Reserve Bank of India for M3 and IMF for GDP
-10
-5
0
5
10
15
20
25
30
35
40
45
Recent trends in Indian money growth% M3 growth rates, data from the Reserve Bank of India
Annual rate
Annualised rate in last three months
Money growth strong, but worries on banks’ structural inefficiency
Summary: In the three months to April 2018, Indian M3 (seasonally adjusted) grew at an annualised rate of 12.3%. This is an increase on the 11.3% recorded in the first three months of the year. It is also the highest growth rate since September 2015, well over a year before November 2016’s mishandled de-monetisation exercise (i.e., the mass withdrawal from circulation of 500 and 1,000 rupee banknotes). The annual M3 growth rate rose from 10.3% to 10.7%, the strongest since April 2016.
The stock of bank lending grew at an annual rate of 12.6% in the second half of April. (The Reserve
Bank of India, India’s central bank, publishes these figures on a bi-monthly basis). Bank lending has
not been growing at such a rapid rate since 2014. It offers further proof that the country’s banks have
come through the de-monetisation exercise, which was accompanied by the annual growth in the
stock of bank loans falling as low as 4.1% in March 2017. Not until the end of 2017 did loan growth
return to pre-de-monetisation levels. Interest rates were cut by 0.25% in August. A further rate cut
looks unlikely in the near future. Annual consumer price inflation, which rose from 4.3% in March to
4.6% in April, remains above the government’s 4% target, while the rupee has weakened by almost
6% against the US dollar since the start of 2018. Monetary loosening is not needed anyway, given the
dynamism in bank lending and the healthy macroeconomic situation. GDP figures for the first quarter
of 2018 have not appeared yet, but the 7.2% annual growth rate in the final quarter of 2017 was the
best figure since Q3 2016. Indian exports were up 5.2% year-on-year in April 2017, which is a
satisfactory growth rate.
India is also benefitting from structural reforms such as the new nationwide goods and services tax
introduced on 1st July 2017 (which replaced a complex fragmented system which discouraged inter-
state trade). Indeed, the macroeconomic picture would be extremely positive were it not for the
worries about non-performing loans. Nationalised between 1969 and 1980, the large publicly-owned
banks were badly managed in the next three decades. They suffered from poor, often highly
politicised credit allocation, while making little attempt to chase delinquent borrowers.
The Indian government has recently introduced legislation which will force banks to take action when
any payment becomes more than 90 days overdue. The loan will automatically be classified as non-
performing and the banks then have to draw up a recovery plan with the borrower. Successive
governors of the Reserve Bank of India have been determined to change the culture in Indian banks. It
was reported earlier this month that one bank, Dena Bank, has been banned from making any further
loans after reported losses of $182.1 million in the first quarter of 2018. Over 22% of its total loans
had been classified as non-performing. This restriction comes only a couple of months after the
discovery of fraudulent activity at the Punjab National Bank, which has resulted in a loss of $2b. (The
scale of potential defaults has not yet been fully quantified.) It is clearly worrying the authorities.
Another ten banks are being directly supervised – and effectively managed – by India’s bank
regulator. High growth of credit and money are to be expected over the medium term.
Tim Congdon and John Petley
20th May 2018, revised 29
th May 2018
% annual growth rate:
M3 Nominal GDP
1991 - 2000 17.4 14.0 2001 - 2010 17.3 14.0 Six years to 2016 11.8 11.6
UK
% annual/annualised
growth rate:
M4x/M4 before 1997 Nominal GDP
1964 – 2016 10.0 8.3 Six years to 2016 4.0 3.6 Year to March 2018 3.8 n/a Three months to March
2018 at annualised rate 1.2 n/a
Sources: Bank of England and Office for National Statistics
-2
0
2
4
6
8
10
12
14
16
Recent trends in UK money growth % M4x growth rates, data from the Bank of England
Annual rate
Annualised rate in last three months
Broad money slowdown intensifies
Summary: In the first quarter of 2018, UK broad money grew at an annualised rate of a mere 1.2%. In the three months to February the figure was 3.0%. In both February and March, the quantity of money fell. That raises concerns that rather than being a blip, the slowing in money growth may be more serious. An increase in banks’ counter-cyclical capital buffer in late November 2017 may be largely to blame. (The CCyB went up from 1% to ½%.) The annual M4X growth rate fell from 4.5% in February to 3.8%. Until February broad money growth had been settled for a year or so largely within the 4% - 5% range which might be deemed ideal for steady macroeconomic growth.
After five months at 3.0% or more, annual UK consumer price inflation dropped in the first quarter of
2018. It fell back to 2.7% in the year to February and then 2.5% in March. Sterling strengthened in the
first four months of the year, but weakened in May. This followed disappointing manufacturing data
and a postponement of any rise in Bank rate by the Bank’s Monetary Policy Committee. Given the
recent strengthening in oil prices, inflation is unlikely to fall any further in the near future. The job
market remains tight, with unemployment steady at 4.2%. Annual wage growth, which rose to 2.8%
in March (the highest figure since September 2015), fell back to 2.6% in April.
Growth in the stock of business loans stands at a satisfactory 3% in the year to March, although there
is little growth in lending to small companies. The number of new mortgages approved fell for a
second consecutive month, down by 4,000 on January’s figures – a drop of almost 7%. The London
property market has slowed, although the overall fall in prices earlier in the year proved fairly short-
lived. Consumer credit remains on a robust upward trend, which contrasts with lacklustre retail
spending. Total aggregate lending fell in March, driven by a reduction in lending to the financial
services sector. This brought the annual growth rate down from 4.2% in February to 2.2%.
Recent evidence is that growth is running at a beneath-trend rate rather than an above-trend rate,
implying that unemployment may soon increase. Predictions of a serious downturn have come from
various quarters since the Brexit vote in June 2016. These have so far proven unfounded, but the
money figures will merit close scrutiny in the coming months as it is possible that a slowdown may be
looming. The UK will undoubtedly be affected also by the Eurozone’s problems.
The political uncertainties surrounding the likely shape of the Brexit settlement are doing nothing to
encourage investor sentiment, while banks are still facing an ongoing regulatory squeeze on capital.
The Bank of England’s justifications for the increase in the counter-cyclical capital buffer are less
than compelling. Even worse the members of the Financial Policy Committee show no understanding
of the relationship between their decisions on banks’ capital, and the rates of growth of the quantity of
money and hence on nominal national income.
Tim Congdon and John Petley
15th May, 2018, revised 29
th May 2018
% annual growth rate: M4/M4x Nominal GDP
1964- 2016 10.0 8.3 1991 – 2000 7.1 5.0 2001 – 2010 6.7 3.9 Six years to 2016 4.0 3.6
