UK money trends still negative

Posted on Wednesday, May 8, 2019 at 10:03AM by Registered CommenterSimon Ward | Comments2 Comments

Euroland monetary trends, as noted last week, suggest that the economic outlook is improving at the margin. UK trends, by contrast, appear to be signalling deteriorating prospects.

Six-month growth of UK real narrow money, as measured by non-financial M1 deflated by consumer prices, was little changed in March, at only 0.8%. Growth of the equivalent Euroland measure increased to 3.7%, resulting in the widest gap since 2010 – see first chart.

The recent stability of the UK series conceals worrying weakness in corporate narrow money: the six-month change in real M1 holdings of private non-financial corporations (PNFCs) was negative for a second month in March – second chart. This is consistent with a profits squeeze partly due to high unit labour cost growth and suggests a further investment cut-back along with weaker hiring. Euroland corporate real M1 growth, by contrast, has firmed recently – see previous post.

Household real M1 expansion looks respectable but has been supported by a savings shift out of mutual funds – retail outflows from such funds totalled £6.9 billion in the six months to March after a £6.4 billion inflow in the previous six months, according to the Investment Association. The third chart shows that a broad savings aggregate encompassing M4 holdings, National Savings and mutual funds ("M4++") is growing more slowly and has been better correlated with consumer spending in recent years. Household money trends often lag corporate developments as fluctuations in labour demand feed through to take-home pay.

A consumer slowdown coupled with a steeper fall in business investment and an end to pre-Brexit stockbuilding could result in a contraction of domestic demand over coming quarters. Avoidance of a recession could depend on a recovery in Euroland demand boosting net exports.

Global money trends inconsistent with rebound hopes

Posted on Thursday, May 2, 2019 at 09:11AM by Registered CommenterSimon Ward | CommentsPost a Comment

Near-complete monetary data confirm that global six-month real narrow money growth fell back in March, retracing half of a modest recovery from an October 2018 low. That low was the basis for the forecast here that global industrial momentum would bottom out around July 2019, since money trends typically lead the economy by around nine months. The absence of a convincing pick-up in money growth, however, suggests that any recovery in economic momentum during the second half will be minor and temporary. Further monetary weakness would raise the possibility of a “double dip” in activity around end-2019.

G7 plus E7 six-month real narrow money growth fell from a 15-month high of 2.0% in February to 1.4% in March, which compares with an October low of 0.9% – see first chart.

Six-month industrial output growth is estimated to have rebounded strongly in March but this reflects a surge in China, probably due to a Lunar New Year timing effect and forward purchasing ahead of a VAT cut; a reversal is expected in April. US industrial output rose by only 0.5% in the six months to March, the slowest growth since 2016, with the manufacturing component contracting.

The suggestion from monetary trends of a low in economic momentum around July is now receiving confirmation from a global leading indicator derived from the OECD’s country leading indicators. The six-month change in this indicator appears to have bottomed in January-February and its average lead time at turning points historically was five months – first chart*.

The rally in equity markets so far this year suggests that investors are already discounting a bottoming of economic momentum and a subsequent recovery. From the perspective here, the danger is that the low occurs later than expected and momentum remains weak through the second half, with a relapse at year-end.

A renewed rise in global six-month real narrow money growth – especially a move back above 3%, as experienced before the seven previous economic accelerations since the 2008-09 recession – would assuage such concerns. Such a pick-up seems unlikely near term.

As previously discussed, the rise in real money growth from the October low did not reflect any improvement in nominal money trends but rather was driven by a fall in six-month inflation that is now starting to reverse – second and third charts.

The global number has also been supported by Indian narrow money strength – fourth chart**. This may be partly election-related and temporary – real money growth also spiked around the 2014 election. Monetary trends remain soft in most emerging economies, with real money contracting in Brazil and Russia.

*Chart includes March indicator estimate based on own calculation of OECD leading indicators for G7 (official March data released on 13 May).
**India has a 7% weight in the G7 plus E7 aggregate.

Euroland money trends turning positive

Posted on Monday, April 29, 2019 at 04:16PM by Registered CommenterSimon Ward | CommentsPost a Comment

A slowdown in Euroland narrow money in late 2017 / early 2018 suggested that the economy would lose momentum over the course of last year. Coincident economic indicators such as the purchasing managers’ surveys were riding high in early 2018 and the ECB and consensus ignored the monetary warning signal.

Could the reverse scenario be about to play out? The manufacturing PMI fell to a six-year low in March, the ECB has slashed its forecasts and commentators are warning of heightened recession risk. Previous posts, however, noted that money trends had improved since late 2018 and March data released today provide further evidence of a pick-up, as discussed below.

One difference from late 2017 / early 2018 is that Euroland monetary developments have “decoupled” from trends in the US and China. Then, Euroland weakness was part of a synchronised global monetary slowdown, suggesting that economic growth would be held back by net exports as well as domestic demand. Now, global money trends have yet to echo the Euroland pick-up, implying that the trade drag may persist.

There are, moreover, downside economic risks from US trade policy and Brexit. These risks are probably dampening business “animal spirits”, in turn implying that any economic pick-up could be muted and / or delayed.

Stronger monetary trends, nevertheless, are judged here to warrant shifting to a positive view of Euroland economic prospects relative to a gloomy consensus. Recession fears, in particular, appear groundless – barring trade / Brexit shocks.

Annual growth of narrow money, as measured by non-financial M1, stabilised around year-end and rose to 7.9% in March, a 14-month high, suggesting that annual nominal GDP expansion will recover later in 2019 – see first chart.

Growth of the broad non-financial M3 measure also increased further, to 5.1%. The headline M1 / M3 money measures are lagging the non-financial aggregates tracked here but have also shown a clear acceleration recently – second chart.

Six-month growth of real non-financial M1 (i.e. deflated by consumer prices) continued its recovery from a low reached in July 2018 and is high by current global standards – third chart*.

Overnight deposits within non-financial M1 break down into household and corporate components; both are expanding solidly – fourth chart.

Deposit growth remains strongest in France and Spain but there was a notable pick-up in Germany last month, while Italy continues to lag – fifth chart.

*Latest data = March except for UK (February).

Six of the best: recent economic news highlights

Posted on Thursday, April 25, 2019 at 10:34AM by Registered CommenterSimon Ward | CommentsPost a Comment

G7 headline consumer price inflation was pushed up by rising energy costs in March but the core rate subsided to a 14-month low – see first chart. The core decline contradicts the consensus forecast last year, based on Phillips’ curve “theory”, that rising capacity use and labour market tightening would boost underlying inflationary pressures.

The core slowdown, however, is consistent with the “monetarist” rule of thumb that inflation follows monetary trends with a long and variable lag, averaging about two years. Global annual narrow money growth peaked in late 2016 and subsequent weakness is now being reflected in falling nominal GDP expansion, a trend likely to continue into 2020 – second chart.

April “flash” PMI results for the US and Euroland showed a stabilisation of manufacturing indices after recent falls. As expected, however, economic weakness is now spreading to services – third chart. This broadening-out increases conviction that labour market resilience will be next to crumble.

Global growth hopes were boosted by sizeable rises in official and Markit Chinese manufacturing PMIs in March but the results were probably affected by forward purchasing to maximise tax relief ahead of a VAT cut from 1 April. Earnings forecast revisions by equity analysts have remained soft – fourth chart. Will April PMI results next week disappoint?

Resurgent investor confidence also reflects a belief that monetary policy-makers “have your back” following the Fed’s U-turn on interest rate guidance and dovish shifts by other major central banks. Fed policy, however, is still tightening because of the delayed ending of QT, with the monetary base projected to contract by a further 6% by end-September – fifth chart.

Markets have ignored a string of negative US activity reports – the Citi economic surprise index is at a two-year low – but narrow money trends suggest further weakness ahead. Six-month money growth slumped in March, with no recovery in early April – sixth chart.

China activity data: hold the champagne

Posted on Wednesday, April 17, 2019 at 12:59PM by Registered CommenterSimon Ward | CommentsPost a Comment

Discount the headlines – the Chinese economy remained soft in early 2019.

Official real GDP numbers are implausibly smooth. Nominal GDP trends are a better guide to economic swings. Nominal GDP changes reflect developments in prices as well as output but a crude adjustment can be made by deflating the numbers by the consumer price index.

The first chart shows two-quarter changes in the above three series, seasonally adjusted*. All three slowed further in the first quarter.

The declines are not an artefact of using two-quarter changes. Quarterly growth of the official real GDP series also fell last quarter, to 1.4% from 1.5% in the fourth quarter.

The further slowdown in nominal GDP is consistent with weak money trends in mid-2018: six-month growth of true M1 reached a low in August last year – second chart.

The subsequent stabilisation and recent modest recovery in narrow money growth suggest that nominal GDP expansion is at or near a low and will revive slightly over the remainder of 2019. A 2016-style acceleration, however, is not in prospect, based on current monetary trends.

What about super-strong industrial output numbers for March, showing a surge in year-on-year growth to 8.5% from 5.3% in January-February? Doesn’t this imply an end-quarter economic pick-up that will feed through into significantly better second-quarter GDP results?

Industrial output strength was not reflected in other monthly series. Retail sales growth, adjusted for inflation, fell slightly compared with January-February – third chart.

Growth of fixed asset investment – a value series – edged higher but remains range-bound. As expected, recent profits weakness has fed through to a slowdown in private investment, offsetting a pick-up in government spending – fourth chart.

The March spike in industrial output growth is partly attributable to the timing of the New Year holidays in 2018 and 2019, which resulted in front-end loading of first-quarter production last year and back-end loading this year. This artificially depressed year-on-year growth in January / February, with a compensating boost to March.

In addition, the VAT cut from April created an incentive for companies to bring forward purchases of inputs to benefit from relief at the old rate. Supplier firms boosted output to accommodate this temporary demand. This probably also partly explains the larger-than-expected rises in official and Markit / Caixin manufacturing PMIs last month.

Both reasons suggest a normalisation of output growth in April to around the first-quarter average of 6.5%.

*Real GDP seasonally adjusted by source; own adjustment for nominal GDP.