Global economic momentum is reviving, consistent with a forecast based on monetary trends, which continue to give a reassuring message.

The monetary measure used for forecasting here is the six-month change in global real narrow money, with “global” defined as the G7 plus seven large emerging economies (the “E7”). Statistical testing shows that this leads the six-month change in industrial output by nine months on average. Turning points in industrial output growth, meanwhile, usually coincide with those in GDP growth.

Real narrow money growth strengthened around end-2014, suggesting a pick-up in industrial output momentum during the second half of 2015. Output has been weaker than expected but the six-month change bottomed in June and appears to have returned to positive territory in September, judging from partial data – see first chart. GDP has been more resilient than industrial output this year, reflecting services strength.

Real narrow money growth moderated over the spring and early summer but has bounced back in August / September, offering reassurance that the global economy will perform respectably in the first half of 2016 – first chart.

The view that the global economy is lifting is supported by news this week, including stronger Japanese / Taiwanese exports in September and upbeat October “flash” PMIs for the Eurozone and Japan. The October Chinese MNI business survey was also stronger.

The rise in global real narrow money growth in August / September mainly reflects a surge in China, discussed in several recent posts, most recently on Monday. With China accounting for about half of the E7, this surge has resulted in real money growth in the E7 crossing above that in the G7 – second chart.

In addition to the re-emergence of a positive gap with the G7, the available September data suggest that E7 six-month real money growth has risen above the 4% level historically associated with emerging market equities outperforming developed markets – see previous post.