Global monetary trends weakened sharply in late 2017 / early 2018 and have yet to recover convincingly, arguing for maintaining a below-consensus forecast for economic growth.

Six-month growth of real narrow money in the G7 economies and seven large emerging economies peaked most recently in June 2017, falling to a nine-year low in February 2018 – see first chart. Based on the historical average nine-month lead time, this suggested that six-month industrial output growth would peak around March 2018, with a subsequent slowdown extending well into the second half. Output growth rose to a seven-year high in March but business surveys are signalling a loss of momentum – second chart.

Real narrow money growth recovered modestly in March but appears to have moved sideways in April, based on monetary data covering 60% of the G7 plus E7 aggregate – first chart. March / April growth was beneath the range between September 2008 and November 2017 and lower than industrial output expansion, a condition historically associated with below-average equity market returns.

Of the major economies, the US, China and Japan have released April monetary data, with Euroland and UK numbers due on 29 and 31 May respectively. US real narrow money growth fell back in April, offsetting rises in China and Japan – third chart.

The recovery in global real narrow money growth between February and April reflected a fall in six-month consumer price inflation, with nominal money expansion little changed – fourth chart. Commodity price trends had suggested that inflation would pull back but a further decline is unlikely unless oil prices weaken.

Previous posts discussed the possibility that global narrow money growth would rebound into mid-2018 in response to US tax cuts and easier Chinese monetary policy, a scenario that would imply better economic prospects for end-2018 / early 2019. US narrow money growth strengthened several months after previous large tax cuts were enacted – fifth chart. April monetary numbers were weak relative to this comparison but it is too early to dismiss the historical pattern.

A possible key difference, however, from these prior episodes is that the monetary base has been contracting, with weakness likely to be sustained by the Fed’s balance sheet reduction plan – sixth chart. Monetary policy, in other words, may be acting as a greater counterweight to fiscal stimulus on this occasion, offsetting the tendency for money growth to rise as tax cuts percolate through the economy.

As expected, Chinese monetary policy has shifted towards easing but this has yet to feed through to a significant rebound in money growth

A downbeat view of global economic prospects, therefore, will be maintained here pending a more convincing recovery in real narrow money expansion.

The monetary signal of slowing global economic momentum through late 2018 is supported by the OECD’s composite leading indicators, an update of which was released this week. Six- and one-month growth of a global trend-restored indicator based on the OECD data fell again in March – seventh chart.