Global economic growth should firm further near-term but is likely to moderate again in late 2014 / early 2015, judging from July money supply data.
The forecasting approach here focuses on the six-month rate of change of global real narrow money*. This fell significantly between May and November 2013, correctly signalling that economic momentum would slow in the first half of 2014, allowing for the usual half-year lead. Global six-month industrial output expansion appears to have bottomed in June, based on partial July data – see first chart.
The six-month real narrow money change fully recovered its 2013 fall in early 2014, suggesting a rebound in economic growth into the autumn. It has, however, drifted lower more recently, though remains well above the November 2013 low. Economic news, therefore, may surprise positively near term before turning mixed in late 2014. (The longer leading indicator followed here is expected to confirm this assessment – a July reading will be available on Monday 8 September.)
The country detail is interesting. In developed markets, the six-month real money change has been strongest in the US and weakest in Japan, consistent with recent economic performance – second chart. This gap should narrow: US strength is fading and the Japanese reading will rebound as the April sales tax rise drops out of the six-month calculation. Eurozone real money growth, meanwhile, is firming, suggesting improving prospects. A recent sharp slowdown in Canada may signal coming economic weakness.
In emerging markets, real narrow money trends are positive in Mexico, China and Korea** but negative in Russia and, particularly, Brazil – third chart. The Mexican / Brazilian divergence has been reflected in economic performance, with GDP rising by 1.5% and falling by 0.7% respectively between the fourth quarter of 2013 and the second quarter of 2014. Indian narrow money is growing strongly in nominal terms but a rebound in inflation has held back real growth.
*Global = G7 plus emerging E7. Real = deflated by consumer prices. Narrow money = currency plus demand deposits (or nearest available measure).
**Korea latest = June.
