A strong acceleration in global real money supply growth in late 2008 suggested that economic activity would bottom in spring 2009 and recover during the second half – see here and here. Recent news remains consistent with this scenario.

Industrial output in the Group of Seven (G7) major economies fell by 19% between February 2008 and March 2009 but has recovered by 1% by May. This reflects a rebound in Japan, Germany and France, which had suffered more severe declines, offset by a continuing slide in the US, partly reflecting auto sector woes.

Purchasing managers' surveys show that new orders are stabilising while companies are still cutting stocks. As destocking slows, firms will need to place additional orders with suppliers, who in turn will be forced to raise production. The second-quarter Conference Board Chief Executive Officer survey released earlier this week signals an imminent recovery in US industrial output – see first chart.

The big story of the first half, however, has been the rebound in emerging economies – second chart. Industrial output in seven large emerging economies – the BRICs plus Korea, Taiwan and Mexico – rose by 3% in the six months to May versus a 10% contraction in the G7. Surveys indicate further acceleration.

This "E7" pick-up is not just about China – third chart. Output is on a rising trend in five of the seven economies, the exceptions being Mexico – which will benefit from a US recovery – and Russia. This reflects a rebound in world trade and effective monetary stimulus in economies where banking systems are still functioning normally.

Emerging world strength coupled with improving G7 prospects suggest that a solid "Zarnowitz" recovery in global activity remains possible – see here and here for a discussion. Credit supply constraints in developed economies are not an immediate obstacle to this scenario since credit demand is usually weak in the first year of economic upswings.

There are two key risks. First, labour market deterioration could lead to a further lurch down in consumer spending, aborting the stocks-led industrial recovery. The US June employment report was disappointing but leading indicators give a more hopeful message – for example, the number of job cuts announced last month was the lowest since March 2008, according to outsourcing firm Challenger, Gray and Christmas.

Secondly, real money growth could slow as weak credit trends offset QE and higher commodity prices lift inflation. This is less of a concern in the US and UK – the Fed and MPC are likely to calibrate asset purchases to ensure stability – than the Eurozone, where M3 is stagnant and the effectiveness of the ECB's QE alternative is in doubt.