Global real narrow money trends appear to have weakened further in October, suggesting that nine-month-ahead economic prospects are still deteriorating.
Six-month growth of real narrow money in the G7 economies and seven large emerging economies is estimated to have fallen again in October, moving below the previous low reached in February, based on monetary data covering two-thirds of the aggregate and near-complete inflation readings – see first chart. If confirmed, the implication is that six-month industrial output momentum is unlikely to bottom before mid-2019.
Real narrow money growth has fallen below the lows reached in 2011 and 2014, suggesting that the current global economic downswing will be at least as significant as the 2011-12 and 2015-16 slowdowns, associated respectively with the Eurozone crisis / recession and China’s near-hard landing.
Annual growth of G7 plus E7 nominal narrow money has more than halved since 2016 and is approaching the low reached in 2008 – second chart. Annual nominal GDP expansion probably peaked in the second quarter of 2018, with a sustained decline in prospect. This slowdown is likely to squeeze profits and snuff out a recent pick-up in wage pressures. Central bankers worrying about inflationary risks are facing the wrong way.
In contrast to 2008, six-month real money momentum is still comfortably positive because consumer price inflation is significantly lower now than then. A recent pick-up in six-month inflation has contributed to the further fall in real money growth – third chart. This pick-up, however, should unwind as a result of falls in oil and other commodity prices, assuming these are not reversed – fourth chart. Commodity price weakness should be reflected in a sharp decline in prices paid indices in purchasing managers’ surveys – fifth chart.
The further fall in G7 plus E7 six-month real narrow money growth has been driven by the E7 component – sixth chart. A previous post discussed an alarming deterioration in trends across the Far East ex. China / Japan and weakness has now spread to Latin America, with six-month changes in real M1 in Brazil and Mexico turning negative – seventh chart.
Equity analysts are cutting earnings forecasts for EM companies at a faster pace, consistent with a significant economic downturn – eighth chart. The sharp fall in the oil price is similarly suggestive of weakening Asian / EM demand.
