Henderson: Global money trends suggesting rising economic / market risks

As previously discussed, the global (i.e. G7 plus emerging E7) narrow money measure tracked here has been depressed recently by India’s “demonetisation” programme, which resulted in M1 falling by 28% between October and December, with a 5% recovery in January. This programme has hit Indian near-term economic prospects but the M1 decline overstates the impact, while the global implications are probably limited. A decision, therefore, was taken to exclude the contraction from the global narrow money measure by recalculating the aggregate keeping Indian M1 at its October level.

Even with this adjustment, global real narrow money has slowed sharply in recent months – six-month growth peaked at 5.5% (not annualised) in August 2016 and is estimated to have fallen to 2.9% in January, based on data for countries comprising two-thirds of the aggregate. Current expansion is the lowest since October 2015 – see first chart.

Turning points in global real narrow money growth have led those in industrial output or GDP growth by an average of nine months historically, with a normal range of six to 12 months. Global real money growth bottomed in August 2015, rising strongly over the subsequent year. Industrial output momentum started to pick up nine months later, i.e. from May 2016.

Based on the nine-month average lead, the fall in global real narrow money expansion since August 2016 suggests that economic growth will peak in May 2017 and decline through October. A turning point, however, could occur as early as February or as late as August. An early peak (i.e. before April) seems unlikely because growth of the non-monetary global leading indicator tracked here (based on the OECD’s country leading indicators) was still rising in December 2016 and has led economic growth turning points by four to five months on average historically – see previous post.

Roughly 70% of the fall in global six-month real narrow money growth since August 2016 can be attributed to a decline in nominal monetary expansion, with the remaining 30% due to higher inflation – second chart. The fall has been broadly based across countries, with the US and China making significant negative contributions – third chart.

Chinese six-month real narrow money growth fell to a 17-month low in January but remains solid by historical standards. Narrow money data can be volatile around the New Year holiday and it is possible that the January decline will be reversed, at least partially, in February. Real broad money growth was stable in January – fourth chart. The Chinese economy is expected here to perform robustly through summer 2017, at least.

US six-month real narrow money growth fell sharply into December 2016 but recovered in January. This recovery is expected here to be reversed in February: the weekly data tailed off at end-January and there is a significant negative base effect from a large monthly rise in August 2016. US monetary trends, therefore, continue to question consensus optimism about economic prospects.