The MSCI All-Country World Index in US dollars was down by 6.5% from its 21 May all-time peak as of Wednesday, the recent low. The modest response to “Grexit” risk and Chinese stock market chaos is consistent with the assessment here of a supportive global economic / liquidity backdrop.

A post in February suggested that global economic growth would pull back into mid-2015 before strengthening in the second half of the year. The pull-back has been sharper than expected: six-month growth of industrial output in the G7 developed economies and seven large emerging economies (the “E7”) fell to zero in May – see chart.

The real or inflation-adjusted money stock leads the economy, typically by about nine months. The recent economic slowdown was signalled by a decline in six-month growth of G7 plus E7 real narrow money in the third quarter of 2014. Real money growth, however, rebounded in late 2014 / early 2015, suggesting stronger economic performance during the second half.

Other leading indicators have improved: a composite G7 plus E7 measure derived from the OECD’s country leading indicator indices recovered significantly in May (new OECD data were released this week). The lower oil price, meanwhile, may start to have a positive economic impact during the second half. An earlier post examined changes in global economic growth after five previous large oil price falls: there was no clear pattern after six months but growth was consistently higher a year later.

An important gauge of liquidity availability for markets is the gap between the growth rates of real money and industrial output. An investment strategy of buying world equities after this gap turns positive but moving to cash when it falls sharply or becomes negative would have outperformed buy and hold by 2.7% per annum over the last 45 years. Real money growth has moderated since February but a simultaneous economic slowdown has maintained a substantial “excess liquidity” cushion.