Global six-month real narrow money expansion – the key economic forecasting indicator employed here – picked up in June after stabilising in April / May. Allowing for the usual half-year lead, this suggests that the six-month change in global industrial output will bottom in October / November and strengthen into year-end.

The global six-month real money growth measure – incorporating data for the G7 and seven large emerging economies – plunged from a peak of 5.2% (not annualised) in December 2011 to 1.8% in February, signalling a major economic slowdown in summer 2012. Six-month industrial output expansion is provisionally estimated to have reached a three-year low of 1.1% in June, with weak manufacturing PMI results for July indicating a further slide – see first chart.

Real money growth, however, edged only slightly lower after February, bottoming at 1.6% in April / May before rebounding to an estimated 2.5% in June (Korea and Russia have yet to release data). The suggestion, therefore, is that economic deterioration will be mostly over by August (i.e. six months from February), although news is unlikely to improve significantly until late 2012.

Narrow money is preferred here because of its superior forecasting performance but real broad money expansion has also firmed recently and stands at a respectable historical level – second chart.

The recent rally in equities may partly reflect anticipation of better economic conditions in 2013. Markets, however, may be underestimating the extent of near-term weakness and / or the pain threshold of central banks expected to deliver major further policy stimulus. The view here will remain cautious pending another month of improved monetary data and signs of stabilisation in the shorter-term leading indicator shown in the third chart – a June reading of this indicator will be available next week.