Global growth has recovered since the summer, in line with a forecast based on monetary trends and leading indicators. This forecasting approach now suggests that growth will pull back slightly into the spring before moving higher again in the second half of 2015.
Global growth can be proxied on a timely basis by the six-month rate of change of industrial output in the G7 and seven large emerging economies (the “E7”). This bottomed in August 2014, rising to an eight-month high in December. A recovery had been signalled by strong G7 plus E7 real (i.e. inflation-adjusted) narrow money expansion in late 2013 / early 2014 and a subsequent increase in the composite longer leading indicator tracked here – see first chart.
Six-month G7 plus E7 output growth may remain around December’s level or move higher in January / February. Japanese production appears to have increased significantly in January – export volume rose by 5.0% – while G7 plus E7 output declined in July / August 2014, implying a favourable base effect.
G7 plus E7 real narrow money expansion, however, fell back in mid 2014, reaching a low in August before rebounding. The lead time of money to output has recently been somewhat longer than the historical average of about six months. The 2014 slowdown in real money, therefore, may be reflected in a pull-back in output growth this spring.
Any growth decline is likely to be modest and temporary for two reasons. First, the G7 plus E7 longer leading indicator has continued to trend higher; it has yet to confirm the loss of momentum suggested by monetary trends. Secondly, real narrow money expansion has rebounded strongly since the summer.
Real narrow money growth, indeed, appears to have reached its highest level since 2012 in January, based on data covering 60% of the G7 plus E7 aggregate. This mainly reflects an energy-driven plunge in inflation but, in addition, nominal money expansion appears to have increased significantly last month, reflecting a big rebound in Chinese M1 growth.
The latter surge, admittedly, is likely to be partly due to the late timing of the lunar New Year holiday. A reversal in Chinese M1 in February, however, may be offset by stronger growth in the US, based on monetary data for the first two weeks.
A fall in US real narrow money expansion last summer suggested that the economy would lose momentum in early 2015 – see second chart and post from September. This is playing out – the Citigroup US surprise index has moved deeper into negative territory – but monetary trends are now signalling economic reacceleration. Eurozone real money, meanwhile, is rising strongly and growth has picked up in Japan, with China probably now following. The global monetary backdrop, in other words, looks increasingly expansionary.
