Monetary trends and leading indicators suggest that G7 economic growth will remain weak through the summer. The message for the E7* large emerging economies is more encouraging.

The first chart shows changes in G7 GDP and industrial output measured over two quarters / six months. Two-quarter GDP growth fell to an estimated 0.5% in the fourth quarter of 2015, or 1.1% at an annualised rate – the slowest since the second quarter of 2014. Industrial output, meanwhile, declined by 1.1% in the six months to December. Note that industrial output is significantly more volatile than GDP, so that a fall of at least 2% over six months would be needed to suggest GDP stagnation or contraction.
The second chart shows six-month changes in industrial output, real narrow money and a composite leading indicator based on OECD data. Real narrow money growth has slowed significantly since early 2015 but remains within its 2011-15 range. It would need to fall beneath this range to suggest a recession. Since the 1960s (at least – earlier data are patchy), every G7 recession has been preceded by a contraction of real narrow money.

The leading indicator, like industrial output, has fallen over the last six months but by less than the 2% GDP stagnation / recession “threshold”.

So both narrow money trends and the leading indicator are currently consistent with a continuation of recent sluggish GDP growth rather than a move into contraction.
The third chart shows the same three indicators for the E7 economies. The six-month change in E7 industrial output turned briefly negative in mid-2015 following a contraction of real narrow money in late 2014. Real money, however, reaccelerated strongly from spring 2015. Industrial output rose slightly in the six months to December and would be expected to pick up pace into the summer, based on the historical relationship.

The leading indicator is also giving a positive message, although has tended to be too optimistic in the recent past.
Divergent G7 / E7 narrow money trends mainly reflect opposite US / Chinese developments. From a monetary perspective, the main concern for global economic prospects is the weakness of US narrow money. The six-month change in real narrow money approached zero in October, recovered in late 2015 but has recently fallen back again – fourth chart**. The latest reading is still consistent with slow GDP expansion rather than a recession but further weakness would be troubling.

Elsewhere in the G7, real narrow money growth has fallen in Japan and, while currently still solid, is showing signs of tailing off in the Eurozone – January Eurozone data are released later this week. The seeming determination of the BoJ and ECB to push rates deeper into negative territory is discouraging for monetary prospects – see previous post.
In the E7, Chinese real narrow money growth is likely to cool from its recent supercharged pace but there is scope for recoveries in Russia and Brazil in response to interest rate / currency stabilisation – fifth chart. Six-month E7 real narrow money growth, therefore, may remain above the G7 level – sixth chart.
*E7 defined here as BRIC plus Korea, Mexico, Taiwan.
**February estimate in chart based on data for first week.