Global (i.e. G7 plus E7) six-month real narrow money momentum is estimated to have edged lower in September, based on monetary data covering 88% of the aggregate. Momentum has been moving sideways since the spring at a weak level by historical standards, suggesting that the global economy will expand at a below-trend pace through mid-2025 – see chart 1. 

Chart 1

Note that the global narrow money measure incorporates an adjustment for a recent negative distortion to Chinese data from regulatory changes, i.e. momentum would be weaker than shown without this correction. 

A low in real money momentum in September 2023 was expected here to be reflected in a decline in global industrial momentum – as proxied by the manufacturing PMI new orders index – into a low in late 2024. October flash results could be consistent with a bottoming out: PMIs fell in Japan and the UK but recovered slightly in the US and Eurozone – chart 2. 

Chart 2

With money trends remaining weak, a manufacturing recovery into H1 2025 was expected to be limited and offset by a loss of momentum in services. Services business activity indices in the Eurozone and UK fell to 20- and 23-month lows respectively in October, according to flash results, with a sharper decline in Japan. US activity and new business indices, however, were strong, although the employment component remained sub-50. 

Chart 3

US relative strength is also evidenced by October earnings revisions ratios, with US net upgrades contrasting with weakness in Japan and Europe, particularly the UK – chart 4. 

Chart 4

US economic outperformance is consistent with a recent wide gap between US and European / Japanese six-month real narrow money momentum. The expectation here was for a US pull-back in September due to an unfavourable base effect but this proved minor, with narrow money rising solidly again on the month – chart 5. 

Chart 5

Eurozone / UK real narrow money momentum continues to recover but disappointingly slowly, suggesting a more urgent need for policy easing. A slump in Japan, initially due to f/x intervention but sustained by BoJ policy tightening, signals likely further negative economic news. 

US narrow money acceleration started long before the September rate cut and hasn’t been mirrored by broader aggregates. One interpretation is that households / firms are accumulating “transactions” money in anticipation of increasing spending after the elections. Chart 6 suggests a tendency for narrow money momentum to pick up into presidential elections and reverse thereafter, with occasional notable exceptions (1984, 2000). 

Chart 6

The MPC’s slowness to cut rates risks aggravating a recent loss of economic momentum and prolonging an inflation undershoot.

The expected 25 bp cut in November would be insufficient to catch up with reductions to date in the Eurozone, Sweden, Switzerland and Canada – see chart 1.

Chart 1

UK annual headline consumer price inflation is as low or lower than in all these jurisdictions except Switzerland – chart 2.

Chart 2

The MPC's focus on the "core services" third of the inflation basket is misplaced. Monetary conditions determine aggregate inflation, with the component breakdown partly shaped by “exogenous” factors. A fall in energy prices and slowdown in food costs have suppressed headline inflation while allowing consumers to spend more on other items, delaying price deceleration in these areas.

This suggested that services disinflation would speed up as commodity prices stabilised or recovered, a development that appears to be playing out – chart 3.

Chart 3

Six-month consumer price momentum continues to mirror the profile of broad money growth two years earlier, a relationship suggesting a further decline and extended undershoot of the 2% target. A recovery in six-month broad money momentum has stalled below the 4.5% pa level historically consistent with 2% inflation – chart 4.

Chart 4

UK six-month real narrow money momentum is negative and similar to levels in the Eurozone, Sweden and Switzerland, suggesting equally poor economic prospects – chart 5.

Chart 5

The double dip mooted in an earlier post could be under way. Recent signs of a loss of momentum include a faster rate of decline of job vacancies and an increase in small firm earnings downgrades – chart 6.

Chart 6

The previous government’s fiscal plans implied significant tightening in 2024 and 2025, according to the OBR – chart 7. Changes to the fiscal rules to be announced by Chancellor Reeves will allow for additional medium-term borrowing but are unlikely to alleviate near-term restriction.

Chart 7

It might be expected that the MPC would be especially sensitive to downside risks, following its mistake of responding too late in the opposite scenario in 2021-22 when inflation was starting to rip. Could confirmation of economic weakness and a restrictive Budget yet put a warranted 50 bp on the table for November?

A post last month suggested that Chinese money growth was bottoming, based on year-to-date policy easing and the space for additional stimulus opened up by a stabilisation of the currency. September money numbers and recent policy announcements bolster this assessment but the scale of monetary acceleration is uncertain.

As previously discussed, narrow money measures have been distorted by regulatory changes in April that reduced the attractiveness of demand deposits, arguing for giving greater weight to broader aggregates. Six-month growth of the preferred broad measure here – M2 excluding deposits of non-bank financial institutions – bottomed in June, edging up further in September. Broad money has led nominal GDP by around six months at momentum turning points historically, suggesting that two-quarter nominal GDP expansion will bottom by year-end – see chart 1.

Chart 1

Narrative about the insufficiency of the latest initiatives may underestimate policy stimulus already in the pipeline. Government net securities issuance reached CNY10.8 trillion or 8.3% of GDP in the 12 months to September, the highest proportion since 2017 and up by 2.6 pp from the prior 12 months. A further increase is likely. The banking system buys the bulk of securities so increased issuance usually boosts broad money growth (unless funds are used to repay other bank lending or increase system capital) – chart 2*.

Chart 2

Stimulus packages in 2008-09 and 2015-16 succeeded in reflating nominal GDP growth; smaller-scale initiatives in 2012-13 and 2019-20 resulted in stabilisation but little increase – chart 3. The extent of a recovery in money growth will signal which scenario is more likely. Markets appear to be discounting the latter: the yield curve (10s-2s) has steepened but less than in 2009 and 2015, while the rally in MSCI China still leaves it on a significant forward P / E discount to the rest of EM – chart 4.

Chart 3

Chart 4

*Increased issuance is reflected initially in a rise in fiscal deposits, excluded from monetary aggregates. The monetary impact occurs when funds are deployed. A rise in fiscal deposits reduced the contribution of banking system net lending to government to annual M2 growth by 0.3 pp in September.

Monetary prospects and cycle considerations suggest global economic strength in H2 2025 / 2026 but a “hard landing” – or at least a scare of one – may be necessary first.

Commentary here at mid-year proposed the following baseline scenario:

• A “double dip” in global industrial momentum in H2 2024 with limited recovery in early 2025, reflecting the profile of real narrow money momentum with a roughly one-year lag.

• Pass-through of industrial weakness to the services sector and – crucially – employment, the latter contrasting with experience during the first “dip” in 2022 when labour markets were in excess demand and unaffected.

• A further decline in consumer price inflation rates to below target in H1 2025, echoing a fall in broad money growth to very low levels in H1 2023, assuming a typical two-year lag.

• A rapid response of monetary policy-makers to downside labour market and inflation surprises, resulting in official rates falling by more by spring 2025 than markets expected in mid-2024.

• A consequent strong pick-up in real narrow money momentum by spring 2025, laying the foundation for an economic boom starting in late 2025, consistent with the cyclical framework suggesting joint strength in the stockbuilding, business investment and housing cycles.

The near-term hard – or hard-ish – landing in this scenario is necessary to elicit policy easing sufficient to drive the later boom. Without it, the global economy could remain stuck in a slow-growth equilibrium into 2026, with policy rates kept above a neutral level despite low inflation.

Incoming news has been consistent with several elements of the baseline scenario but others require confirmation:

• The global manufacturing PMI new orders index fell to a 21-month low in September. Global six-month real narrow money momentum bottomed in September 2023, signalling a likely PMI trough by end-2024 – see chart 1.

Chart 1

• Real narrow money momentum has been moving sideways since the spring at a low level by historical standards, consistent with industrial momentum remaining weak in early 2025.

• Manufacturing weakness appears to be transferring to services. The global services PMI new business index remained at an expansion-consistent level in September but output expectations fell sharply to a 23-month low – chart 2.

Chart 2

• Employment weakness has yet to crystallise. The global composite PMI employment index is below a low reached during the first dip in 2022 but not yet in contraction territory (50.0 in September). The US economy has continued to add jobs, although payrolls numbers are probably still overstating growth and average weekly hours have fallen.

• Inflation news has been favourable. Six-month headline / core consumer price momentum in the US and Eurozone has moved lower since mid-2024, while global PMI output price indices for consumer goods and services have stabilised close to their 2015-19 averages, when G7 annual core CPI inflation averaged 1.6% – chart 3.

Chart 3

• Monetary authorities have in most cases shifted dovishly since mid-year. A major Chinese policy pivot at quarter-end could lead to a strong rebound in narrow money growth, supporting the expectation of global acceleration.

To summarise, the baseline scenario is still on track but requires confirmation from early further deterioration in labour market news as well as continued inflation progress.

The stabilisation of global six-month real narrow money momentum at a weak level conceals significant geographical dispersion. A strong pick-up in the US has been offset by falls in China and Japan, while a slow recovery in the Eurozone has caught up with a stalling UK – chart 4.

Chart 4

The rise in US momentum is puzzling and challenges the expected scenario of economic weakness and labour market deterioration into H1 2025. A near-term stall or reversal would reduce this tension and is plausible, with large monthly rises in March / April about to drop out of the six-month comparison.

Momentum remains negative across Europe but – except in the UK – has continued to recover, with a further acceleration expected as a pattern of rate cuts at successive policy meetings is established. UK-Eurozone monetary convergence is at odds with market themes of UK relative economic resilience and inflation stickiness, and incoming data could force the MPC to shift dovishly soon.

Interpretation of Chinese monetary trends has been clouded recent regulatory changes that have reduced the attractiveness of demand deposits, resulting in a switch into time deposits and money substitutes. The narrow money measure shown in chart 4 incorporates an adjustment but the “true” picture could be stronger or weaker. Previous large stimulus packages have fed rapidly through to monetary acceleration but – even if this occurs – economic momentum is likely to remain weak through Q2 2025, at least.

The cyclical framework used here judges current global economic weakness to reflect mid-cycle corrections in stockbuilding and business investment upswings, rather than new downswings in either cycle. The stockbuilding cycle (3-5 years) bottomed in Q1 2023 but an initial recovery due to an ending of destocking has fizzled as final demand has remained weak. The assumption is that policy easing will generate a second leg up in 2025, with a cycle peak possibly delayed until 2026.

The primary trend in the business investment cycle (7-11 years, last low 2020) is also still up, with the current correction probably attributable to a combination of restrictive interest rates, a profits slowdown and heightened uncertainty. Corporate financial balances (retained earnings minus capex) are in surplus in the US, Japan and Eurozone and a recovery in global economic momentum in 2025 could generate a strong “accelerator” effect on investment as animal spirits revive.

A key assumption is that the long-term housing cycle (average 18 years), which bottomed in 2009, will enjoy a final burst of strength in response to lower rates before peaking, possibly in 2026. One reason for believing that the upswing is incomplete is that peaks were historically associated with mortgage lending booms: annual growth of US residential mortgages reached double-digits before downswings into lows in 1957, 1975, 1991 and 2009. The high so far in the current cycle has been 9% (in 2022), with lower numbers in the Eurozone and UK.

The mid-year commentary suggested that defensive equity market sectors would outperform as a H2 double dip unfolded. They did through early September but cyclical sectors rebounded on hopes of rapid Fed easing and large-scale Chinese stimulus. Even if forthcoming, the economic effects will be delayed and may already be discounted in relative valuations – chart 5.

Chart 5

Markets have historically correlated with the stockbuilding cycle, so one approach to assessing investment potential is to compare returns so far in the current cycle with an average of prior upswings. As shown in table 1, US equities, cyclical sectors and gold have performed more strongly than the historical average in the 18 months since the cycle trough in Q1 2023, suggesting limited further upside and possible reversals, even assuming a late cycle peak.

Table 1 

International equities – particularly emerging markets – have, by contrast, underperformed relative to history in the current cycle, while commodity prices have been unusually weak. Though also likely to suffer in any near-term hard landing scare, these areas have catch-up potential in the baseline scenario of global economic acceleration through 2025 driven partly by the stockbuilding cycle upswing entering a second phase.

Monetary trends suggest that UK economic performance will converge down to a weak Eurozone.

A post in June argued that Eurozone monetary trends were too weak to support a sustained recovery. The composite PMI output index peaked in May and fell below 50 in September (flash reading of 48.9), confirming an ongoing “double dip”.

The UK economy has outperformed year-to-date: GDP grew by 1.2% between Q4 and Q2 versus a 0.5% rise in the Eurozone, while the composite PMI has moved sideways above 50 (September flash reading of 52.9).

This outperformance, however, follows relative weakness in H2 2023, when GDP contracted in the UK but eked out a small gain in the Eurozone. Q2 year-on-year GDP growth rates are similar, at 0.7% and 0.6% respectively.

This pattern – of UK underperformance in H2 2023 followed by a catch-up in 2024 – had been signalled by monetary trends. Six-month real narrow money momentum was weaker in the UK than the Eurozone in 2022 through Q2 2023 but UK momentum recovered faster last year and had opened up a lead by Q1 2024 – see chart 1.

Chart 1

The lead, however, has been narrowing since April and almost closed in August, partly reflecting a recent stalling of the UK recovery. With momentum still negative, the suggestion is that UK and Eurozone economic performance will be similarly weak through early 2025.

As well as supposed UK relative economic strength, the expectation that rates will be slower to fall in the UK than the Eurozone incorporates a belief that inflation will prove stickier. This is also at odds with monetary trends.

Inflation rates are tracking the profile of broad money momentum two years earlier, in line with a simplistic monetarist prediction. Annual broad money growth was lower in the UK than the Eurozone in 2022 and 2023, suggesting that an undershoot of UK annual CPI inflation versus the Eurozone over May-July will resume in 2025 – chart 2.

Chart 2

A UK double dip would be blamed partly on the confidence-sapping impact of the new government’s gloomy fiscal pronouncements. The MPC’s failure to deliver timely easing would carry much greater responsibility.

A pick-up in US narrow money momentum is a hopeful signal for 2025 but requires confirmation and does not preclude near-term economic deterioration.

The measure of narrow money tracked here (M1A, comprising currency in circulation and demand deposits) rose by 0.8% in August, pushing six-month annualised growth up to 10.5% – see chart 1.

Chart 1

The broad M2+ measure (which adds large time deposits at commercial banks and institutional money funds to the official M2 aggregate) also rose solidly in August, by 0.5%, but six-month growth remains subdued and within the recent range, at 3.5% annualised.

Six-month expansion of official M1 is weaker, at 2.1%. M1 is no longer a narrow money measure, following its redefinition in 2020 to include savings accounts.

Narrow money outperforms broad as a leading indicator of economic direction. The recent pick-up suggests that demand and activity will be gaining momentum by mid-2025. It does not, however, preclude – and may be consistent with – current economic deterioration.

Six-month narrow money momentum similarly recovered from negative to 10% annualised in September 2001 and September 2008. In both cases, the economy was within a recession that the NBER had yet to recognise.

Those narrow money rebounds may have partly reflected a rise in liquidity preference associated with an increase in saving, i.e. they may have been a signal of a reduction in current demand. They also, however, implied potential for future economic reacceleration when liquidity preference normalised and money balances were redeployed.

The 2001 / 2008 experiences were atypical: in earlier recessions, six-month narrow money growth rose strongly only at the end of – or after – the period of economic contraction.

A reasonable assessment, therefore, is that a pick-up in narrow money momentum is a neutral or negative signal for current economic momentum but positive for prospects six to 12 months ahead.

The current positive message is tempered by several considerations.

First, six-month momentum is likely to fall back in September / October because of negative base effects: narrow money rose by a whopping 3.1% (20.0% annualised) in March / April combined.

Secondly, the currency and demand deposit components of narrow money have been individually correlated with future activity historically but the recent pick-up has been solely due to the latter, with currency momentum unusually weak – chart 1.

Thirdly, the Fed funds target rate had been cut by 350 bp and 325 bp respectively by the time six-month narrow money momentum reached 10% annualised in 2001 and 2008. The Fed’s tardiness has increased the risk of a monetary relapse.