Previous posts have discussed the possibility of a V-shaped "Zarnowitz" rebound in global industrial activity – e.g. here. A sharp recovery in new orders indices in the latest round of purchasing managers' surveys is consistent with the early stages of such a pick-up – see first chart. For the scenario to develop, however, credit conditions must ease and solid monetary growth must be sustained.

As expected, the April Federal Reserve survey of senior bank loan officers showed a reduction in the net percentage reporting a tightening of lending standards on commercial and industrial lending. The fall was smaller than in the equivalent UK survey but larger than in the ECB's Eurozone poll. The US reading suggest a stabilisation of industrial output over coming months but needs to improve further to be consistent with a strong recovery – second chart. This is likely if the recent better tone in credit markets is sustained.

The Fed survey also reported a big decline in demand for commercial and industrial loans, which some commentators interpreted as a negative economic signal. This slump, however, is probably connected with heavy destocking, as well as a fall in borrowing to finance share buy-backs. The stocks cycle is now turning, lifting activity and potentially credit demand, while buy-backs are of limited relevance for economic prospects. In any case, credit trends tend to follow not lead output – commercial and industrial loans and the ratio of consumer installment credit to personal income are components of the Conference Board's US lagging economic index.

Credit weakness is of concern only if it translates into slower growth in the money supply, which leads the economic cycle (M2 is included in the Conference Board's leading index). Annual growth in G7 real narrow and broad money measures stood at 11% and 7% respectively in March, suggesting ample liquidity to support a strong economic recovery. Shorter-term trends, however, are less favourable: US M2 rose at an annualised rate of just 2% in the latest 13 weeks, while Eurozone M3 contracted between December and March – third chart.

For a Zarnowitz scenario to play out, money measures need to reaccelerate. This is more likely in the US, where the impact of weak credit demand may fade and the Fed's bond-buying operations will continue to provide a boost, than in Euroland, with the ECB still refusing to embrace QE. (Purchases of covered bonds of €60 billion announced yesterday amount to less than 1% of Eurozone annual GDP and the ECB appears to be planning to sterilise the impact on the monetary base.)

The recent rebound in business surveys was presaged by a rise in the equity earnings revisions ratio (the difference between the numbers of analyst upgrades and downgrades expressed as a proportion of the total number of estimates) – fourth chart. The recovery in this ratio has stalled in recent weeks and, like the money numbers, bears close watching: any relapse could signal less favourable business survey results over the summer, possibly associated with another "growth scare" in markets.