G7 plus emerging E7 six-month real narrow money expansion – the key cycle forecasting tool employed here – appears to have risen further in July, confirming April / May as a trough and suggesting that the global economy will regain momentum in late 2012 / early 2013, allowing for the usual half-year lead. The real money pick-up, however, is at risk from a rebound in inflation.
The global real money measure plunged between December and February, signalling the recent loss of industrial momentum – see first chart. It continued to edge lower into the spring before rebounding in June, with the recovery extending in July, based on data for the US, Japan, Brazil, China and India – second chart. The July improvement mainly reflects a sharp increase in China – see previous post. The final July reading will depend importantly on Eurozone numbers released on 28 August.
Monetary policy easing may boost nominal money supply expansion through the second half but real growth may be curbed by a rebound in inflation in response to recent gains in energy and food commodity prices – third chart. Commodity price strength, in other words, could dampen economic prospects beyond early 2013, thereby presenting a risk to the current rally in equities.