Investors’ default position is to be downbeat about prospects for global economic growth, following the serial disappointments of recent years. Global narrow money trends suggest a significant risk of an upside surprise in the second half of 2016.
Narrow money – currency in circulation plus demand deposits and close substitutes – tends to lead the economy because the demand to hold it is influenced importantly by spending intentions. Global real (i.e. inflation-adjusted) narrow money contracted before the 2008-09 recession and rebounded strongly before the subsequent recovery. It has also signalled milder economic fluctuations in recent years; a sharp fall in real money growth in 2011, for example, foreshadowed an economic slowdown in 2012.
Six-month growth of global (i.e. G7 plus emerging E7) real narrow money fell over spring / summer 2015, bottoming in August before rebounding later in the year. Allowing for a typical nine-month lead, this suggested that “global economic momentum will remain soft in early 2016 but rise in the spring / summer”, to quote from a post here at end-December.
The narrow money pick-up has gathered pace in early 2016. April data covering 60% of the global aggregate suggest that six-month growth of real money rose to more than 5%, or over 10% annualised, which would be the fastest since 2009 – see first chart.
As discussed in a post last week, the monetary signal of an upturn in economic growth in spring / summer 2016 has received support from a non-monetary leading indicator calculated from the OECD’s country composite leading indicators – first chart.
The further rise in global real narrow money growth in April has been driven by sharp increases in the US and Japan – second chart. The US pick-up was discussed previously and suggests that economic growth will rebound solidly by late 2016.
Japanese narrow money has surged since the Bank of Japan cut the marginal interest rate on bank reserves to -0.1% on 29 January. Part of this increase may reflect a portfolio reallocation in response to negative rates that has no implication for future spending. The surge, however, mirrors a sharp rise in Eurozone narrow money immediately after the ECB cut the deposit rate to negative in June 2014; this rise correctly signalled an improving economic outlook.
Narrow money is now giving a positive signal in all the major economies. As the second chart shows, the six-month change in real narrow money has been weak or negative in at least one economy for most of the past five years: the UK / Eurozone over 2010-12, Japan / China in 2014 and the US in 2015. Simultaneous solid real narrow money growth last occurred in late 2012 / 2013 and was followed by stronger global economic expansion and a significant rise in government bond yields.