Global monetary trends have been signalling a revival in economic momentum in late 2015 and respectable growth in the first half of 2016 – see previous post. The lift was expected to be driven by Europe and Asia, with relatively weak US money growth suggesting moderate economic expansion at best.
Incoming news remains consistent with this scenario. November “flash” PMI surveys surprised positively in the Eurozone and Japan but negatively in the US. The German Ifo survey was strong, confirming a bullish signal from trucking activity – see Friday’s post. Export order responses in the German / Japanese surveys, meanwhile, suggest that global trade is reviving.
US indicators are mixed rather than signalling weakness. On the positive side, truck sales remain strong and single-family housing permits rose to a new recovery high last month. While the PMI was softer, the Philadelphia Fed manufacturing survey recovered in November and is often a better guide to the national ISM result.
Global money trends, on the analysis here, are giving a reassuring message but are not outright strong. Claims have recently been made, however, that global real or inflation-adjusted money growth is at its highest level, excluding the 2008-09 period, since the late 1980s. Such claims are dubious.
The chart shows annual rates of change of real (i.e. consumer price index-deflated) narrow / broad money and bank lending in the G7 and seven large emerging economies (the "E7"). Real narrow money (M1) growth is around the middle of its range since 2010. Real broad money (M3) growth, similarly, is below its peak in early 2013 and significantly lower than in 2006-07.
One recent report stated that global real M1 growth had risen to an annual 11%, compared with a 7% estimate here for the G7 plus E7. The former figure is difficult to reconcile with national data. On the latest numbers, real M1 growth is 12.5% in China, 11.8% in the Eurozone, 5.7% in the US and 5.4% in Japan. While real money is rising significantly faster in some emerging economies (Korea, Mexico), it is contracting in others (Brazil, Russia). To generate a “global” estimate of 11%, it is necessary to assign much higher weights to China and Euroland than their shares of world GDP, while omitting E7 laggards*.
*The G7 plus E7 aggregates are constructed by combining monthly percentage changes in national series using GDP-based weights. This approach is appropriate if 1) the focus of interest is G7 plus E7 GDP and 2) national GDP prospects depend on national money trends. The alternative of adding up currency-adjusted national money supply levels may be misleading because of large cross-country differences in liquidity preference: for example, the ratio of M1 to GDP in China is more than three times that in the US, so the adding-up approach assigns a much larger weight to money growth in China than the US.
