Monetary trends in mid to late 2016 suggested that global economic growth would surprise positively in early 2017 but momentum would peak in the spring and slow significantly over the summer (see, for example, here). Recent “soft” economic news (i.e. diffusion indices from business and consumer surveys) has been buoyant, consistent with the forecast, but some “hard” information (i.e. official quantitative data) has lagged – particularly in the US, where GDP may have grown by only 0.5% at an annualised rate in the first quarter, according to the Atlanta Fed. The expectation here is that the weakness in some hard data series will be reversed in the second quarter but that soft news is now peaking and will moderate into mid-year. Both soft and hard data are then likely to weaken through late 2017. Near-term strength in hard data may pose a risk to markets because it will reinforce a shift towards tighter monetary policies at a time when underlying economic momentum is starting to fade.

Most hard data news has, in fact, been solid, if less buoyant than survey evidence. The global industrial output measure tracked here – covering the G7 economies and seven large emerging economies (the “E7”) – is estimated to have risen at a 3.2% annualised pace in the first quarter of 2017. The US has contributed to this performance, with manufacturing output growing by 2.8% annualised, the fastest since 2014.

The long-standing forecast here has been that six-month growth of G7 plus E7 industrial output would peak in the second quarter, possibly in May, and moderate through the third quarter. This reflects a fall in six-month real narrow money growth from a peak in August 2016 – real money growth turning points have led those in output growth by an average of nine months historically. Real money growth reached a low in December 2016 and appears to have rebounded sharply in March, based on partial data – see first chart. This profile, however, partly reflects India’s demonetisation programme, implemented in early November, which resulted in an immediate plunge in narrow money M1 followed by a V-shaped recovery. The third line in the first chart shows an adjusted real money growth series that attempts to iron out this volatility by holding Indian narrow money stable at its October level. This measure reached a low in February, with an estimated small recovery in March. Both the unadjusted and adjusted measures remain significantly below the August 2016 peak. Monetary trends, therefore, continue to signal a weaker economic outlook, with industrial output growth likely to slow through late 2017 (based on the February trough in the adjusted measure).


Confidence here in an imminent reversal of economic momentum has been reinforced by recent OECD leading indicator data (published for February and estimated for March). Six-month growth of a composite G7 plus E7 indicator derived from the OECD country data appears to have peaked in January, with one-month growth falling for a fourth consecutive month in March – second chart. Leading indicator growth turning points have led those in industrial output growth by four to five months on average historically, so this aligns with the monetary forecast that six-month output expansion will top out around May.


The next stage of the scenario should be a fading of business survey strength. The third chart shows a composite G7 plus E7 survey indicator that combines diffusion indices for new orders or output expectations, mostly for the industrial sector. This measure is closely correlated with the widely-monitored Markit global manufacturing purchasing managers’ index (for which a hefty subscription is required for data access) and – like the PMI – has been a coincident to very short leading indicator historically (albeit benefiting from a short publication lag). The indicator may have peaked out in February / March, consistent with a May peak in six-month output expansion.


A softening of business surveys would be expected to be accompanied by a less favourable balance of revisions of company earnings forecasts by equity analysts. The G7 plus E7 business survey indicator correlates closely with the MSCI All Country World Index (ACWI) earnings revisions ratio (seasonally adjusted), which has moderated from a February peak – fourth chart.


The recovery in global six-month real narrow money growth in March suggests that the coming slowdown in economic momentum will bottom out in late 2017 but more evidence is required before adopting this as a central scenario.

The above forecast contrasts with the mood of optimism at the IMF spring meeting of the global policy-making elite and the opinion of the FT’s chief economics commentator, who states that “[t]he world economy is improving” and “[t]here is now a reasonable chance of a cyclical recovery”. The Keynesian consensus, of course, was pessimistic nine months ago as the economy was gaining momentum in line with earlier monetary strength.