UK money trends: continued weakness

Posted on Thursday, January 31, 2019 at 10:41AM by Registered CommenterSimon Ward | CommentsPost a Comment

UK money trends, while not deteriorating further, continue to suggest a weak economic outlook. GDP growth may fall below 1% this year even if a no-deal Brexit is avoided.

Six-month growth rates of real narrow and broad money (non-financial M1 / M4) were little changed in December and remain low by historical and international standards – see first chart.

Real money growth, as in Euroland, has been supported by a fall in inflation. In addition, Brexit and other risks may have boosted the precautionary demand for money, in which case current money growth rates may overstate near-term prospects for spending on goods and services.

Consistent with the latter story, retail investors sold mutual funds in the fourth quarter of 2018 for the first time since the EU referendum quarter in 2016 (and on a larger scale than then)*. Bank of England commentary, meanwhile, notes an above-average rise in household M4 holdings in December, driven by deposits in interest-bearing instant access savings accounts. A savings measure combining M4 holdings, mutual funds, National Savings and foreign currency deposits (“non-financial M4++”) is growing more weakly than the money aggregates – second chart.

Broad money trends have been supported from the credit side by steady expansion of bank and building society lending to the private sector. The latest Bank of England credit conditions survey, however, suggests a coming lending slowdown – third chart.

The OECD’s UK composite leading indicator continues to give a gloomy message for economic prospects, falling further in December – fourth chart**. The indicator is designed to predict the direction of GDP relative to trend, i.e. a decline signals below-trend growth, with trend currently estimated at 2.0% per annum. Four of the six components exerted a negative influence in December – consumer confidence, local share prices, expected services demand and interest rates***.

The above developments argue for the Monetary Policy Committee to shift to an easing bias at its upcoming meeting, although such a move appears unlikely.

*Source: Investment Association.
**Estimate based on data for five of six components. OECD data released on 11 February.
 ***The other components are car sales and expected manufacturing output.

Euroland money trends: false positive?

Posted on Tuesday, January 29, 2019 at 10:09AM by Registered CommenterSimon Ward | CommentsPost a Comment

Recent Euroland money / credit news has been a mixed bag. The assessment here is that economic momentum is likely to remain weak but a region-wide recession will be avoided barring an external shock.

December money numbers released yesterday were, on the face of it, positive. Six-month growth rates of real narrow and broad money (i.e. non-financial M1 and non-financial M3*) rose notably, in the latter case to an 18-month high – see first chart. Allowing for a typical nine-month lead, the suggestion is that GDP growth will rebound in the second half of 2019.

There are, however, grounds for caution. Stronger real narrow money growth has been driven by a slowdown in inflation, reflecting pass-through of weaker energy and food commodity prices, with nominal money trends stable – second chart. Inflation is likely to recover unless commodity prices weaken further, so real money growth could fall back.

The stronger performance of broad money, which has accelerated in nominal as well as real terms, could be argued to warrant optimism. Narrow money, however, has outperformed broad money as a leading indicator historically. Real broad money growth rose in 2010 and 2015 without a corresponding pick-up in narrow money; the economy subsequently slowed – first chart.

The ratio of narrow to broad money, indeed, has itself been a reasonable leading indicator of activity historically; this ratio continues to slow – third chart.

A further reason for caution is that narrow money trends may be starting to diverge across economies. Italian real non-financial overnight deposits contracted in the six months to December – fourth chart. A core / periphery divergence opened up before the 2009-10 and 2011-12 recessions. Euroland-wide GDP reacceleration is unlikely if the Italian economy is moving into recession.

The ECB's fourth-quarter bank lending survey released last week, meanwhile, indicated less favourable expected trends in credit supply and demand – fifth and sixth charts. A slowdown in private sector lending could dampen broad money growth.

An interesting question for monetary anoraks is why broad money growth has picked up despite slowing QE. The counterparts analysis of the headline M3 measure shows that a fall in the government contribution to money growth, which incorporates the QE effect, has been more than offset by a shift from contraction to expansion in the banking system’s net external assets – seventh chart.

The interpretation here is that QE boosted domestic credit expansion but had little impact on broad money because “excess” liquidity was exported through the non-bank capital account of the balance of payments – the contraction of banks’ net external assets was the mirror-image of this capital outflow. With QE slowing, the outflow fell in the second half of 2018 and was smaller than the current account surplus, resulting in banks’ external position contributing positively to monetary growth. The stronger “basic” balance of payments position, i.e. current account plus non-bank capital account, could support the euro – eighth chart.

*Money holdings of financial institutions are excluded because they are volatile and unlikely to be relevant for assessing near-term prospects for spending on goods and services.

2016 replay?

Posted on Thursday, January 24, 2019 at 12:04PM by Registered CommenterSimon Ward | CommentsPost a Comment

Claims are being made that current economic / market conditions resemble those in early 2016.

The MSCI All-Country World Index (ACWI) fell by 20.2% in US dollar terms between May 2015 and February 2016 as the global economy slowed significantly, with the manufacturing PMI dropping to 50.0. Activity and equities, however, rebounded strongly over the remainder of 2016 as policy stimulus boosted the Chinese economy and the Fed paused rate hikes for 12 months.

The ACWI index fell by a slightly larger 20.7% from a January 2018 high to the Christmas low, while the manufacturing PMI weakened to 51.5 in December, with early flash results suggesting a further decline this month. Chinese policy-makers are easing again and markets are discounting only a 15% chance of a Fed rate rise this year, according to the CME FedWatch tool (as of yesterday).

Commentaries here were positive about economic / market prospects in the first half of 2016 but current conditions differ in two important respects. First, global monetary trends are much weaker. Six-month growth of G7 plus E7 real narrow money bottomed in August 2015 and was moving up to a double-digit annualised pace as the equity market rally started in early 2016. Real money growth may have bottomed in October 2018 but a significant recovery has yet to unfold – first chart.

Secondly, the G7 stockbuilding or inventory cycle was bottoming out in early 2016 but – on the assessment here – is currently in the early stages of a downswing, which may extend into the second half of 2019.

A key cycle gauge is the annual change in G7 stockbuilding expressed as a percentage of GDP. This was still moving higher in the third quarter of 2018, the most recent data point, consistent with the cycle approaching a peak. It was, by contrast, significantly negative in the first quarter of 2016, having topped a year earlier – second chart.

Business surveys provide a cross-check of the national accounts stockbuilding data and are more timely. As the chart shows, the annual change in a G7 survey-based indicator remained positive in December, supporting the assessment that the bulk of the cycle downswing lies ahead.

If the recent recovery in global real narrow money growth were to be sustained during the first half of 2019, and assuming that the current stockbuilding cycle is of average length (3.5 years), conditions could resemble those in early 2016 sometime during the second half of the year. A sustained monetary pick-up probably requires, at a minimum, the Fed to suspend “quantitative tightening”. Markets may have to weaken further to prompt such a shift.

Chinese money trends signalling further slowdown

Posted on Thursday, January 17, 2019 at 11:13AM by Registered CommenterSimon Ward | CommentsPost a Comment

Weak Chinese December money and credit numbers signal that policy easing has yet to translate into an improvement in economic prospects.

The preferred narrow and broad monetary aggregates here are M1 plus household demand deposits – i.e. true M1 – and M2 excluding deposits of financial institutions. Six-month growth of true M1 fell back towards the recent August low – see first chart.

Growth of M2 excluding financial institutions’ deposits rose to an 18-month high, a development some commentators may cite as a hopeful signal. The interpretation here is that broad money is being boosted by the contraction of the shadow banking system and a consequent shift of assets and liabilities onto banks’ balance sheet. The rise in bank deposits, that is, has probably been the counterpart of a larger fall in unrecorded shadow bank liabilities.

If the rise in broad money growth signalled stronger spending and activity, it would be expected to involve an acceleration of demand as well as time deposits, i.e. narrow money growth would also have recovered.

A similar divergence of broad and narrow money trends occurred in G7 economies in late 2007 / early 2008 as shadow banking systems collapsed – second chart. Narrow money correctly signalled coming economic weakness. A contraction in broad money was delayed until 2009-10, when shadow banking stabilised – economic activity was then recovering strongly.

Credit trends are consistent with the negative message from narrow money. Six-month growth of total social financing, which partially includes shadow credit, fell to a new low in December on the historical definition excluding local government special bonds (among other items) – first chart.

Sectoral money trends suggest weaker prospects for business than consumer spending. The six-month change in demand deposits of non-financial enterprises (NFEs) remained negative in December but household growth has recovered recently, possibly partly reflecting the impact of actual and scheduled tax cuts – third chart.

Real as well as nominal money trends are weak. Six-month growth of true M1 deflated by consumer prices reached a low in October, barely recovering in November / December – fourth chart. Allowing for a typical nine-month lead, this suggests a further slide in economic momentum into the third quarter.

Policy easing has accelerated in December / January. January money numbers will be make-or-break for hopes of a second-half economic rebound.

US C&I loan surge signalling stocks cycle downswing

Posted on Monday, January 14, 2019 at 02:56PM by Registered CommenterSimon Ward | CommentsPost a Comment

A surge in US banks’ commercial and industrial (C&I) loans in late 2018 supports the view here that the stockbuilding cycle has peaked and will act as a drag on GDP growth in 2019.

Commercial banks’ loans and leases rose by 1.6% between September and December, or 6.5% at an annualised rate – the fastest since 2016. The pick-up reflected a 4.0% surge, or 17.1% annualised, in C&I loans, which account for about a quarter of the total – see first chart.

C&I loan growth is related to the level of stockbuilding, since companies typically draw down bank credit lines to finance an increase in inventories. Changes in stockbuilding, meanwhile, influence GDP growth. It follows that GDP growth depends on the rate of change of C&I loan growth, i.e. the C&I loan “impulse”.

The year-on-year change in three-month C&I loan growth rose to its highest since 2011 in December, suggesting that stockbuilding will have made a strong positive contribution to year-on-year GDP growth in the fourth quarter – second chart. The level of the impulse is consistent with a cycle peak, i.e. the stockbuilding contribution is likely to weaken and turn negative over coming quarters, with “multiplier” effects on other GDP expenditure components.