Global economic growth appears to be moderating, consistent with the forecast here of a summer slowdown from a spring peak. Monetary trends, however, are improving, suggesting that the slowdown will prove temporary and growth will bounce back in late 2017.

Evidence of a loss of momentum includes falls in the Citigroup G10 economic surprise index, which is now negative, and the MSCI World earnings revisions ratio (i.e. the net percentage of upgrades to earnings forecasts for MSCI World constituents). The revisions ratio correlates with the global (i.e. G7 plus E7) business survey indicator tracked here, which appears to have peaked in February / March and may subside further in June – see first chart.


The forecast that the slowdown will extend over the summer, and possibly beyond, is supported by a global leading indicator derived from the OECD’s country leading indicators. Six-month growth of this indicator fell again in April, having peaked in January. Its average lead time with respect to industrial output historically has been 4.5 months, suggesting that six-month output growth is at or past a peak and will decline through August / September – second chart.


The economic slowdown was first signalled by a decline in six-month growth of global real (i.e. inflation-adjusted) narrow money from a peak in August 2016 – the average lead time from real money to output is nine months. Weakness was magnified by India’s demonetisation programme but growth fell significantly even stripping out the India drag, with the decline extending into February 2017 – third chart.


The adjusted real money growth measure, however, rebounded in March / April, with partial data suggesting a further solid increase in May. India is now boosting the headline number – M1 has retraced 80% of the demonetisation-related decline. Money trends, therefore, are signalling that the global economy will regain momentum in late 2017 / early 2018.

A strong pick-up in US real narrow money growth, discussed previously, has been the key driver of the rebound in the global measure. Japanese growth has also firmed, while Chinese growth has stabilised after moderating in late 2016 / early 2017 – fourth chart.


The US monetary turnaround casts doubt on recent commentary expressing pessimism about economic prospects based on a negative “credit impulse”. The credit impulse (i.e. the rate of change of credit growth) has had a variable relationship with economic activity historically and is typically coincident rather than leading. Commercial bank loans and leases rose in April and May after stagnating over the prior four months – fifth chart. The impulse, that is, may be turning positive, consistent with the earlier positive signal from money trends (which usually lead credit).


The main risk to the scenario of global reacceleration from late 2017 is a further slowdown in Chinese real narrow money in response to recent policy restriction, i.e. a loss of Chinese economic momentum could offset the expected US pick-up. The Fed, however, is now downplaying global developments in its policy decisions; it would be likely to proceed with its tightening plan unless Chinese cooling triggered a significant “risk-off” move in markets.