Six-month growth of global* real narrow money – the key forecasting indicator followed here – remained solid in June, suggesting respectable economic prospects through end-2014.

Real narrow money growth bottomed in November 2013, rising significantly through February / March 2014. Allowing for the typical half-year lead, this signalled that six-month industrial output expansion would rebound from a trough to be reached in spring 2014, probably May. Output growth may have ticked higher in June – see first chart**.

The summer growth rebound scenario is supported by the latest purchasing managers’ surveys and equity analysts’ earnings revisions. The G7 PMI manufacturing new orders index rose for a third successive month in July, while the earnings revisions ratio*** reached its highest level since 2011 – second chart.

Real narrow money growth fell slightly in April / May but stabilised in June and is still well above the November 2013 low. The message is that industrial output expansion may peak at the end of the current quarter but should remain solid in late 2014 – first chart. This assessment is expected to be confirmed by June leading indicator data to be released on Monday 11 August.

The current significant gap between real narrow money and output growth suggests a supportive liquidity backdrop for markets.

The small decline in real narrow money expansion since March reflects a rise in six-month inflation rather than any slowdown in nominal monetary trends – third chart. This inflation increase should partially reverse during the second half of 2014, assuming that commodity prices are stable at recent levels**** – fourth chart.

Real broad money is growing less quickly than the narrow measure emphasized here but is not giving a negative economic signal – fifth chart. Broad money has been less reliable for forecasting purposes in recent years and over the longer term – see previous post for more discussion.

*G7 developed plus E7 emerging economies.
**The June estimate in the chart incorporates actual data for the US, Japan, Brazil, China, Korea, Russia and Taiwan and an assumption that Eurozone and UK output reversed May declines.
***Upgrades minus downgrades as a proportion of the total number of analyst estimates.
****The impact of the Japanese sales tax rise will drop out of the six-month comparison in October.