Chinese money / credit trends still weak before tariff escalation

Posted on Tuesday, May 14, 2019 at 11:47AM by Registered CommenterSimon Ward | Comments2 Comments

The PBoC today released detailed monetary data for April, allowing calculation of true M1, the preferred narrow money measure here. Six-month growth of the aggregate, seasonally adjusted, rose to a 14-month high but remains low by historical standards – see first chart. Allowing for the usual lead, the suggestion is that two-quarter nominal GDP expansion will stabilise at a weak level in the second / third quarters and recover modestly towards year-end.

A similarly downbeat message was delivered by April credit numbers released on Friday. Strong monthly flows of total social financing (TSF) in January and March led some commentators to claim that credit growth was picking up. As previously discussed, when seasonally adjusted and scaled by the outstanding stock, the monthly numbers were unimpressive. Six-month TSF expansion continued to move sideways in April, also at an historically weak level – first chart.

The disappointingly small response of narrow money trends to recent policy easing is highlighted by the second chart, showing year-on-year growth of true M1 and the 12-month change in the two-year government bond yield, plotted inverted. Falls in yields in 2005, 2008, 2011-12 and 2014-15 were followed by rises in true M1 growth of between 9.0 and 24.3 percentage points (pp). April true M1 growth of 4.7% was only 1.6 pp above a February low.

An optimist might point out that the lag from interest rate changes to money growth appears to have been lengthening, so a strong monetary pick-up could be about to kick in. The preferred explanation here, though, is that the transmission mechanism of policy has been weakened by the clampdown on shadow banking. This is a key element of longer-term financial reforms and is unlikely to be abandoned in response to an escalating US / Chinese trade war.

Global industrial output contracting ex. China

Posted on Monday, May 13, 2019 at 03:43PM by Registered CommenterSimon Ward | CommentsPost a Comment

The forecast here at the start of the year was that global economic momentum – as measured by the six-month rate of change of industrial output in the G7 economies and seven large emerging economies – would continue to weaken through around July 2019. How is this forecast playing out?

Six-month output growth fell to a 33-month low in February but recovered in March – see first chart.

This recovery, however, reflected a surge in Chinese output, partly in compensation for weak activity in January / February but apparently also influenced by stockpiling of inputs ahead of April’s VAT cut – second chart.

Ex. China, global industrial output contracted in the six months to March: G7 output stagnated while production in the rest of the E7 fell at its fastest pace since 2015.

A Chinese April number is due this week and is likely to show a sharp reversal. Year-on-year growth of exports also spiked higher in March but slumped back close to January / February levels last month – third chart.

Assuming a Chinese relapse, G7 plus E7 six-month output growth should resume its fall, moving below the February low. The global manufacturing PMI is consistent with further weakness – fourth chart. The expectation here is that the six-month output change will bottom in negative territory and probably below the 2015 trough.

UK money trends still negative

Posted on Wednesday, May 8, 2019 at 10:03AM by Registered CommenterSimon Ward | Comments2 Comments

Euroland monetary trends, as noted last week, suggest that the economic outlook is improving at the margin. UK trends, by contrast, appear to be signalling deteriorating prospects.

Six-month growth of UK real narrow money, as measured by non-financial M1 deflated by consumer prices, was little changed in March, at only 0.8%. Growth of the equivalent Euroland measure increased to 3.7%, resulting in the widest gap since 2010 – see first chart.

The recent stability of the UK series conceals worrying weakness in corporate narrow money: the six-month change in real M1 holdings of private non-financial corporations (PNFCs) was negative for a second month in March – second chart. This is consistent with a profits squeeze partly due to high unit labour cost growth and suggests a further investment cut-back along with weaker hiring. Euroland corporate real M1 growth, by contrast, has firmed recently – see previous post.

Household real M1 expansion looks respectable but has been supported by a savings shift out of mutual funds – retail outflows from such funds totalled £6.9 billion in the six months to March after a £6.4 billion inflow in the previous six months, according to the Investment Association. The third chart shows that a broad savings aggregate encompassing M4 holdings, National Savings and mutual funds ("M4++") is growing more slowly and has been better correlated with consumer spending in recent years. Household money trends often lag corporate developments as fluctuations in labour demand feed through to take-home pay.

A consumer slowdown coupled with a steeper fall in business investment and an end to pre-Brexit stockbuilding could result in a contraction of domestic demand over coming quarters. Avoidance of a recession could depend on a recovery in Euroland demand boosting net exports.

Global money trends inconsistent with rebound hopes

Posted on Thursday, May 2, 2019 at 09:11AM by Registered CommenterSimon Ward | CommentsPost a Comment

Near-complete monetary data confirm that global six-month real narrow money growth fell back in March, retracing half of a modest recovery from an October 2018 low. That low was the basis for the forecast here that global industrial momentum would bottom out around July 2019, since money trends typically lead the economy by around nine months. The absence of a convincing pick-up in money growth, however, suggests that any recovery in economic momentum during the second half will be minor and temporary. Further monetary weakness would raise the possibility of a “double dip” in activity around end-2019.

G7 plus E7 six-month real narrow money growth fell from a 15-month high of 2.0% in February to 1.4% in March, which compares with an October low of 0.9% – see first chart.

Six-month industrial output growth is estimated to have rebounded strongly in March but this reflects a surge in China, probably due to a Lunar New Year timing effect and forward purchasing ahead of a VAT cut; a reversal is expected in April. US industrial output rose by only 0.5% in the six months to March, the slowest growth since 2016, with the manufacturing component contracting.

The suggestion from monetary trends of a low in economic momentum around July is now receiving confirmation from a global leading indicator derived from the OECD’s country leading indicators. The six-month change in this indicator appears to have bottomed in January-February and its average lead time at turning points historically was five months – first chart*.

The rally in equity markets so far this year suggests that investors are already discounting a bottoming of economic momentum and a subsequent recovery. From the perspective here, the danger is that the low occurs later than expected and momentum remains weak through the second half, with a relapse at year-end.

A renewed rise in global six-month real narrow money growth – especially a move back above 3%, as experienced before the seven previous economic accelerations since the 2008-09 recession – would assuage such concerns. Such a pick-up seems unlikely near term.

As previously discussed, the rise in real money growth from the October low did not reflect any improvement in nominal money trends but rather was driven by a fall in six-month inflation that is now starting to reverse – second and third charts.

The global number has also been supported by Indian narrow money strength – fourth chart**. This may be partly election-related and temporary – real money growth also spiked around the 2014 election. Monetary trends remain soft in most emerging economies, with real money contracting in Brazil and Russia.

*Chart includes March indicator estimate based on own calculation of OECD leading indicators for G7 (official March data released on 13 May).
**India has a 7% weight in the G7 plus E7 aggregate.

Euroland money trends turning positive

Posted on Monday, April 29, 2019 at 04:16PM by Registered CommenterSimon Ward | CommentsPost a Comment

A slowdown in Euroland narrow money in late 2017 / early 2018 suggested that the economy would lose momentum over the course of last year. Coincident economic indicators such as the purchasing managers’ surveys were riding high in early 2018 and the ECB and consensus ignored the monetary warning signal.

Could the reverse scenario be about to play out? The manufacturing PMI fell to a six-year low in March, the ECB has slashed its forecasts and commentators are warning of heightened recession risk. Previous posts, however, noted that money trends had improved since late 2018 and March data released today provide further evidence of a pick-up, as discussed below.

One difference from late 2017 / early 2018 is that Euroland monetary developments have “decoupled” from trends in the US and China. Then, Euroland weakness was part of a synchronised global monetary slowdown, suggesting that economic growth would be held back by net exports as well as domestic demand. Now, global money trends have yet to echo the Euroland pick-up, implying that the trade drag may persist.

There are, moreover, downside economic risks from US trade policy and Brexit. These risks are probably dampening business “animal spirits”, in turn implying that any economic pick-up could be muted and / or delayed.

Stronger monetary trends, nevertheless, are judged here to warrant shifting to a positive view of Euroland economic prospects relative to a gloomy consensus. Recession fears, in particular, appear groundless – barring trade / Brexit shocks.

Annual growth of narrow money, as measured by non-financial M1, stabilised around year-end and rose to 7.9% in March, a 14-month high, suggesting that annual nominal GDP expansion will recover later in 2019 – see first chart.

Growth of the broad non-financial M3 measure also increased further, to 5.1%. The headline M1 / M3 money measures are lagging the non-financial aggregates tracked here but have also shown a clear acceleration recently – second chart.

Six-month growth of real non-financial M1 (i.e. deflated by consumer prices) continued its recovery from a low reached in July 2018 and is high by current global standards – third chart*.

Overnight deposits within non-financial M1 break down into household and corporate components; both are expanding solidly – fourth chart.

Deposit growth remains strongest in France and Spain but there was a notable pick-up in Germany last month, while Italy continues to lag – fifth chart.

*Latest data = March except for UK (February).