Recent coincident economic news is consistent with the long-standing forecast here that global growth would moderate in early 2014. Monetary trends, however, hint that the current slowdown will be modest and temporary.
The forecasting approach here places particular weight on two indicators: global real narrow money expansion and a composite longer leading indicator. The leading indicator typically signals turning points 4-5 months in advance and fell further in December 2013, implying slower growth through spring 2014 – see last week’s post.
Real narrow money expansion, however, stabilised over September-November 2013 and recovered in December. It appears to have maintained this higher level in January, based on data for five countries comprising about 60% of the global aggregate – see first chart. Allowing for the usual half-year lead, the suggestion is that the current economic slowdown will be contained and growth will regain momentum in mid-2014.
Real narrow money growth rose in four of the five available countries in January – second chart. A sharp deterioration in China, moreover, may have been exaggerated by the end-month reporting date coinciding, unusually, with the New Year holiday. Chinese broad money and credit flows held up better last month.
A further monetary development of note is a surge in US M1 in the week ending 3 February – third chart. Weekly data can be volatile but this may indicate that US monetary improvement is continuing, with positive implications for second-half economic prospects.
While the latest monetary news is reassuring for the global economic outlook, real money expansion remains slightly below industrial output growth, suggesting that the liquidity backdrop for markets is neutral at best.
The final January reading for the global narrow money measure will depend importantly on Eurozone data released on 27 February.
