Global six-month real narrow money growth – the key forecasting indicator monitored here – appears to have partially reversed a sharp August fall in September, based on data covering 60% of the aggregate. The recent behaviour of the indicator suggests that industrial output growth will rebound near-term before declining again from early 2015.

Real narrow money growth fell during the second half of 2013, correctly signalling an economic slowdown during the first half of 2014 – see chart. It revived in early 2014, however, resulting in a forecast here of a recovery in economic momentum from the summer, based on an average half-year lead from money to activity. Economic weakness, instead, has extended, with six-month industrial output growth falling to a 21-month low in August. This extension is consistent with normal variation in the money / activity lead time.

Real narrow money growth remained solid through July but dropped sharply in August. The preliminary data suggest that it remained well below the first-half average in September.

To summarise, real money trends do not support market fears that the global economy is sliding into another recession. Such a scenario would require that 1) the rise in real money growth in early 2014 was a false signal and will not be reflected in a near-term recovery in output growth and 2) the economy will enter a recession without a prior real money contraction – historically a rare occurrence.

As stated in a post last week, the expectation of a recovery in output growth will be maintained unless real money expansion or the longer leading indicator tracked here weaken further. The leading indicator was little changed in August while an energy-driven fall in inflation will support real money growth near term.