Global Real Money Growth Still Slowing

The measure of global real money supply expansion followed here slowed further in July, based on data for countries with a weighting of about 60% in the aggregate. The measure peaked in April / May. Allowing for the usual half-year lead, this suggests that economic momentum will top out in October / November and begin to fade at end-2013.

Specifically, six-month growth in real narrow money in the G7 and emerging E7 economies fell from 3.8% (not annualised) in May to 2.8% in June and an estimated 2.4% in July. The latter, if confirmed, would be the slowest since July 2012 – see first chart.

The scenario of a late 2013 economic slowdown has yet to be confirmed by a longer-term leading indicator derived from the OECD’s country leading indices – see previous post. This indicator, which has led by an average of five months at recent turning points, rose further in June, consistent with solid economic expansion through November. A July reading will be available on 9 September.

The second chart decomposes real money growth into nominal monetary expansion and inflation. A rebound in inflation has contributed significantly to the recent real money slowdown, although nominal growth has also eased.

The inflation drag on real money may stabilise. The third chart compares six-month changes in consumer and commodity prices. Commodities have driven the major fluctuations in CPI inflation in recent years. Inflation undershot the relationship in early 2013 but has since reconnected with the "prediction". Absent a large move in commodity prices, the suggestion is that inflation will plateau.

The fourth chart shows real money growth for countries that have released July data. The further decline in the global measure was driven by a sharp fall in China; as discussed in a recent post, this may partly reflect temporary factors but is nonetheless disappointing. The final July global reading will depend importantly on Eurozone data scheduled for release on 28 August.

The approach here will be to await leading indicator confirmation of the monetary signal before turning more cautious on global economic and equity market prospects. Despite the recent slowdown, real money growth remains above industrial output expansion, suggesting still-supportive liquidity conditions – bear markets usually begin only after the real money / output growth gap has turned negative.