Global short and longer-term leading indicators followed here suggest that recent slower economic growth will persist through late spring. As expected, the short indicator (average 2-3 month lead at turning points) fell further in January, while the longer measure (4-5 months) stabilised – see first chart. Six-month global industrial output growth appears to have peaked at end-2013 and, based on these readings, may decline into April / May.
The stabilisation in the longer-term leading indicator is tentative, subject to revision and should not be overemphasised. It is, however, consistent with a revival in global real narrow money expansion that started in December and continued in February, judging from early data – second chart*. Allowing for an average 6-7 month lead, this suggests a recovery in global economic momentum in mid-2014. The further rise in real money growth in February was driven by US strength and a reversal of weakness in China – see Monday’s post.
The investment implications of these divergent trends are open to debate. A possible scenario is that elevated equity markets will correct as near-term economic data softens before rebounding in anticipation of the stronger second half implied by monetary trends – assuming that the money growth pick-up is sustained. Bulls, of course, will argue that markets will look through a temporary soft patch, especially with data distorted by weather effects and a forward shift of Japanese demand / output ahead of April’s sales tax rise.
The uncertainty is mirrored by the two equities versus cash investment rules followed here – see previous post for more details. The first rule prefers equities if G7 real narrow money is growing faster than output; it remains invested currently. The second rule requires the G7 longer leading indicator to be above its historical average in order to hold stocks; it has recently shifted to cash. The last buy signals of the two rules were in September 2011 and August 2012 respectively.
*February monetary data are available for the US, China, Japan, India and Brazil, together accounting for about 60% of the global aggregate. Growth in other countries is assumed to be unchanged from January.
