Global leading indicator confirming monetary warning signal

Posted on Monday, February 5, 2018 at 04:02PM by Registered CommenterSimon Ward | CommentsPost a Comment

Incoming evidence is consistent with the view here that the global economy will slow significantly later in 2018.

As suggested by earlier partial data, six-month growth of real narrow money in the G7 and seven large emerging economies fell to its lowest level since 2009 in December. Real broad money growth also weakened further. The most recent peak in real money growth occurred in June / July 2017, suggesting a decline in six-month industrial output growth starting around March / April 2018, allowing for the average nine-month historical lead – see first chart.

A peak in economic momentum around the end of the first quarter is now also being signalled by a shorter-term G7 plus E7 leading indicator based on the OECD’s country composite leading indicators (which do not generally include money measures). This indicator usually leads by between three and five months and its six-month growth edged down in December. One-month growth has fallen for three consecutive months – second chart.

The assessment here is that economic strength in early 2018 partly reflects the final stage of the upswing in the US / global stockbuilding cycle, which is judged to have bottomed in early 2016 and usually tops out after about two years. The US ratio of inventories to final sales of goods and buildings continued to fall sharply in the fourth quarter of 2017, with demand boosted by recovery spending in hurricane-affected areas – third chart. This suggests a high level of stockbuilding in early 2018 as firms seek to restore the ratio to a normal level. The level of GDP growth depends on the change in stockbuilding, so a moderation of the latter later in 2018 would imply a drag on economic momentum.

Consistent with this interpretation, the ISM manufacturing inventories index rose sharply in January, while the Atlanta Fed’s GDPNow model currently projects that an increase in stockbuilding will boost first-quarter GDP growth by 1.25% at an annualised rate.

If the scenario of a second-quarter slowdown is correct, global business surveys should be at or near a peak. The US ISM manufacturing new orders index fell slightly in January, as did new orders components of manufacturing PMI surveys in China (NBS and Markit) and Euroland / the UK (Markit). The lagged relationship with global real narrow money growth suggests a significant decline in the ISM measure by mid-2018 – fourth chart.

Slowing economic momentum would be expected to be associated with a reversal of recent outperformance of cyclical equity market sectors, defined by MSCI to include materials, industrials, consumer discretionary, financials and IT. Cyclical sectors are historically expensive relative to defensive sectors, defined as energy, consumer staples, health care, telecommunications and utilities: the ratio of the price to book of the MSCI World cyclical sectors index to that of the defensive sectors index is at its highest level since 2000 – fifth chart.

Global money trends still weakening

Posted on Friday, January 26, 2018 at 03:52PM by Registered CommenterSimon Ward | CommentsPost a Comment

Global policy-makers are trumpeting “synchronised” economic growth. They should, instead, be worrying about synchronised monetary weakness, which is ringing alarm bells about economic prospects for later in 2018.

Euroland money numbers for December released today were soft. Six-month growth of real narrow money – defined as non-financial M1 deflated by consumer prices – fell further to its lowest level since 2014. Real broad money growth also declined sharply – see first chart.

The real money slowdown reflects both lower nominal monetary expansion and a rise in six-month inflation. Six-month growth of nominal narrow money was also the lowest since 2014 last month – second chart.

Six-month real narrow money growth also fell further in December in the US, China and Japan. Our “global” measure covering the G7 and seven large emerging economies appears to have reached the bottom of its range since 2009 – third chart*. 

Global six-month real narrow money growth peaked most recently in June / July 2017 and has led turning points in industrial output growth by nine months on average in recent years (and over the longer term). This suggests a loss of economic momentum in the second quarter of 2018 extending well into the second half.

Weaker global monetary trends reflect significant US and Chinese policy tightening since late 2016. QE tapering by the ECB and BoJ, meanwhile, has slowed capital outflows and boosted the euro and yen – earlier currency falls played a key role in generating current Euroland / Japanese economic “strength”.

Will US tax cuts head off or mitigate a loss of global economic momentum? A significant stimulatory impact would probably be signalled by a rebound in US narrow money growth in early 2018. A negative view will be maintained here barring such a reversal.

*December monetary figures are available for countries accounting for 83% of the G7 plus E7 aggregate.

Is the UK labour market overheating?

Posted on Wednesday, January 24, 2018 at 11:10AM by Registered CommenterSimon Ward | CommentsPost a Comment

Rising UK labour shortages seem to be feeding through to faster pay growth, supporting the arguments of MPC hawks such as Michael Saunders and suggesting shortening odds of an early further increase in interest rates.

The number of full-time employees rose by a very strong 0.9% in the three months to November, to stand 2.3% higher than a year before. Solid expansion had been suggested by an earlier increase in job vacancies, which climbed further in the three months to December.

The job openings or vacancies rate* of 2.9% is the highest on record in data extending back to 2001.

The CBI quarterly industrial trends survey released this week reported the highest percentages of firms experiencing shortages of general and skilled labour since 2004 and 1974 respectively – see first chart.

As well as strong labour demand, rising shortages reflect a smaller inflow of workers from the rest of the EU. Annual labour force growth, however, is only slightly below its average in recent years – second chart.

The unemployment rate was stable at 4.3% in the three months to November but a wider measure of underemployment including involuntary part-timers and those inactive but wanting a job fell further, to a new low in data back to 1992 – third chart.

Average weekly regular earnings of private sector employees rose by 2.5% from a year before in November, unchanged from October, but a three-month moving average grew by an annualised 3.5% in the latest three months – fourth chart. The average number of hours worked per week, moreover, has fallen recently, implying a stronger increase in hourly earnings. The earnings numbers continue to understate labour cost expansion because of rapidly-rising pension contributions and the apprenticeship levy.

*Vacancies as a percentage of employees plus vacancies.

UK public finances still surprising positively

Posted on Tuesday, January 23, 2018 at 11:28AM by Registered CommenterSimon Ward | CommentsPost a Comment

UK public sector net borrowing is on course to undershoot the Office for Budget Responsibility’s £49.9 billion forecast for 2017-18, partly reflecting resilient tax receipts – consistent with the assessment here that economic growth is holding up.

12-month rolling borrowing fell to £39.4 billion in December, the lowest since January 2008 – see first chart. The December number was flattered by a one-off £1.2 billion credit from the EU, and the OBR expects self-assessment tax receipts over the remainder of 2017-18 to be significantly weaker than a year earlier – such receipts are forecast to fall by £3.1 billion for the year as a whole. Even so, the OBR appears to have been much too pessimistic about borrowing prospects in its November assessment – again.

Central government taxes and national insurance contributions rose by 4.2% in the first nine months of 2017-18 from a year before versus the OBR’s forecast of a 2.8% full-year increase – likely to be overshot even incorporating the projected decline in self-assessment receipts. Year-on-year growth of taxes and NICs has moved sideways since spring 2017, suggesting stable nominal GDP expansion – second chart.

Chinese money trends signalling weaker outlook

Posted on Thursday, January 18, 2018 at 10:41AM by Registered CommenterSimon Ward | CommentsPost a Comment

Chinese economic growth remained solid in late 2017, as had been suggested by narrow money trends through the summer. The latest narrow money numbers, however, were notably weaker – barring a swift reversal, the suggestion is that economic prospects are darkening.

Officially-reported real GDP rose by 6.8% in the year to the fourth quarter, beating a consensus forecast of 6.7%. Growth was supposedly equal in the first and second halves.

Nominal GDP, deflated by consumer prices, is probably a better guide to “true” activity*. Two-quarter growth of this measure peaked in the first quarter of 2017, fell back in the second and third quarters but staged a partial recovery in the fourth. A second-half slowdown had been predicted by six-month real narrow money growth, which fell significantly between August 2016 and January 2017. Real money growth, however, stabilised between January and September at a respectable level by historical standards, suggesting that economic momentum would remain solid into early 2018 – see chart.

The reassuring signal from narrow money trends through September contradicted forecasts that monetary and regulatory policy tightening would lead to a significant economic slowdown by end-2017. Followers of the “credit impulse”, in particular, have been too negative.

Real narrow money growth, however, fell further over October-December and is now in the lower half of its range in recent years. Unless money growth bounces back, the suggestion is that the economy will lose momentum in the spring / summer.

Narrow money trends usually lead house prices, industrial profits and producer prices – all three are likely to slow in early 2018. On past form, the authorities would be expected to respond by starting to reverse policy tightening. Such a policy reversal would be a surprise to the consensus and could give a short-term boost to commodity prices.

The risk is that policy-makers are now prioritising limiting credit expansion and financial risks and will be slow to step off the brakes, in which case monetary trends – and economic prospects – may continue to deteriorate in 2018.

*Consumer prices are an unsatisfactory proxy for the GDP deflator but this distortion may be less significant than the “smoothing” incorporated in official real GDP data.