The current mini-upswing in global growth may top out in the spring. The extent of any subsequent slowdown will depend importantly on whether recent ECB policy easing succeeds in reviving Eurozone monetary expansion.

The first chart below shows six-month growth in global industrial output (i.e. a composite of the G7 and seven large emerging economies) together with the two key forecasting measures employed here – six-month real narrow money expansion and a leading indicator derived from the OECD’s country leading indices. The indicator signals turning points in output momentum about three months in advance while real money typically moves three months earlier (i.e. six months before output).
 
Faster real money growth from mid 2011 predicted recent economic acceleration, a forecast that was confirmed by an upturn in the leading indicator later last year. The indicator continued its pick-up in December (data released earlier this week), consistent with six-month output growth rising at least through March.

Six-month real narrow money expansion, however, appears to have peaked in November, falling back sharply in January, based on partial information. Allowing for the usual six-month lead, this suggests that output growth will top in May, a scenario that would be confirmed by the leading indicator peaking around February.

The second chart shows that the estimated January fall in global real money expansion mainly reflected weakness in China, where the reading was depressed by the early New Year holiday and should bounce back in February. US strength, however, has started to wane, possibly reflecting QE2 stimulus fading – “operation twist” has weaker monetary effects. Sustaining solid global real money growth, therefore, may depend on the ECB's interest rate cuts and liquidity injections reversing recent Eurozone weakness – January monetary figures will be released on 27 February.

The working hypothesis here – subject to revision in light of new monetary data – is that the ECB’s actions will prove at least partially effective and that global real narrow money will continue to expand at a respectable pace, consistent with a modest downshift in economic momentum from the spring rather than anything worse.