The first “monetarist” forecasting rule – that the real (i.e. inflation-adjusted) money supply leads economic activity by about six months – worked well again at the global level in 2012, predicting both economic weakness over the summer and a revival of momentum towards year-end. Equity markets anticipated these shifts, with the MSCI World index falling sharply between March and June but rebounding to the year’s high in December.
In US dollar terms, the MSCI World return index (i.e. reinvesting dividends) is higher than in all but 10 months of its history (using month-end data) – see first chart. A tax-exempt investor in the index, in other words, would be in profit unless he / she bought between April and December 2007 or in May 2008.
The key monetary forecasting indicator monitored here, six-month global real narrow money expansion, rose again in October and may have stabilised in November, based on data for countries accounting for about 60% of the aggregate – second chart. (Eurozone and UK numbers are due for release on 3 January.) Allowing for the typical six-month lead, this suggests that the current economic upswing will extend at least through April 2013, although US fiscal policy may inject volatility at the start of the year.
The third chart shows real narrow money expansion in major countries that have published November monetary data, with a December estimate also included for the US, based on the first two weeks. A notable rise in Chinese and Japanese growth since the first half has been overshadowed by another US monetary surge, partly reflecting the resumption of QE in September. The US pick-up may drive another rise in the global aggregate in December and suggests a strong counterweight to coming fiscal tightening.
Survey evidence remains consistent with the global economy lifting at end-2012. December manufacturing purchasing managers’ surveys will be released next week, but both equity analysts’ earnings revisions and Korean firms’ export expectations are signalling a rebound in G7 new orders following a set-back in November – fourth and fifth charts.
