Hendersons: Will the global economy boom in 2017

 If activity, instead, remains weak, it will indicate that the monetary transmission mechanism has failed and monetary indicators have gone haywire – with extremely bearish implications for asset prices.

There are four key reasons for adopting a boom as a central investment scenario:

1) Global real narrow money is surging. Six-month growth of real narrow money in the G7 plus emerging E7 economies is estimated to have risen to about 5.5% (11.5% annualised) in August, the fastest since 2009, ahead of a sustained period of solid global expansion – see first chart. Monetary trends are strong across the major economies.

2) The US three- to five-year Kitchin stockbuilding cycle is probably at or near a low. Downswings in this cycle are associated with US / global economic slowdowns (e.g. 2011-12) or recessions if they coincide with weakness in the Juglar business investment and / or Kuznets housing cycles (e.g. 2008-09) – see previous post for more discussion. The change in inventories subtracted 0.8 percentage points from GDP growth in the year to the second quarter, turning negative in that quarter, suggesting that the current downswing is complete – second chart.

3) The US seven- to 11-year Juglar business investment cycle appears to be entering another expansion phase following a mid-upswing pause partly due to the oil bust. The cycle last bottomed in 2009 and is scheduled to reach another low between 2016 and 2020. A late date is now more likely, with recent data signalling a recovery in equipment and mining investment – third and fourth charts.

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