Brits are holding more and more cash, and it is a worrying sign for the UK’s post-Brexit economy, according to research from Pantheon Macroeconomics.
Pantheon’s UK Economic Monitor, circulated to clients on Monday morning, notes that in the nearly three months since the UK voted to leave the European Union, the country’s supply of narrow money — essentially the amount of money in circulation in the form of physical notes and coins — has surged.
Year-on-year growth in the amount of money in the UK has increased substantially, hitting 8.3% in August, compared to 5.5% in December last year. The latest stats released by the Bank of England earlier in September suggest that growth in the amount of cash circulating will continue to grow.
Here is the chart:
In response to that surge, it has been suggested, particularly by critics of the Bank of England, that the bank’s Monetary Policy Committee made a big mistake in August, when it cut interest rates to a record low of 0.25%, and launched a new programme of quantitative easing. As Pantheon’s chief UK economist Samuel Tombs says in his research (emphasis ours):
“This strong growth has fuelled accusations that the Monetary Policy Committee made a serious policy error in August when it cut rates and restarted QE. Critics point out that the money supply was not mentioned in the August Inflation Report or in the minutes of September’s MPC meeting.”
Others have reportedly suggested that the growth in narrow money suggests — along with better than expected data from the services, manufacturing, and construction sectors of the British economy in the last couple of months — that the British economy is faring well since Brexit. That is almost entirely wrong, Pantheon argues, saying (emphasis ours):
“As our chart above shows, narrow money accelerated as the economy entered recession in 2008. Growth in narrow money also picked up at the turn of the millennium, when fears abounded that electronic payment systems would stop working because of the “Y2K” bug. In short, uncertainty, not income growth, drives money demand.
“It is unlikely to be a coincidence that strong money growth has occurred alongside a collapse in business and consumer confidence and pessimism about the U.K.’s economic outlook since the Brexit vote in June. Note that the pick-up in narrow money growth has tracked the plunge in sterling, which has been a barometer of investors’ confidence in the U.K.’s economic outlook.”
By contrast, people actually tend to have less desire to hold money in times of confidence. Pantheon cites the fact that at the peak of the UK’s post-recession recovery in mid-2014, demand for physical cash hit a record low. Here is the chart referenced by Tombs and his team:
Pantheon, which has consistently argued that the British economy is going to face serious impacts from the Brexit vote, ends on a pretty pessimistic saying:
“Accordingly, we doubt that strong growth in the money supply signals that an economic renaissance is on the way. On the contrary, the pick-up in the desire of households and firms to hold money, as opposed to other assets, is a worrying signal.”
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