Global growth: reculer pour mieux sauter

11th April 2015 by Simon Ward

A post in February suggested that global growth would pull back into mid-2015 before strengthening significantly in the second half of the year. This scenario remains on track judging from monetary trends and leading indicators.

Global growth is proxied here by the six-month rate of change of industrial output in the G7 and seven large emerging economies*. This rebounded between August and December 2014, stabilising in early 2015 – see first chart.

The OECD today released February data for its country leading indicators, allowing an update of the global longer leading growth measure followed here. This had been stable at a respectable level through January but fell back in February, consistent with a near-term loss of economic momentum**.

Monetary trends suggest that this pull-back will be modest and temporary. The real or inflation-adjusted money supply leads activity by six to 12 months, according to the monetarist rule. Global six-month real narrow money growth fell between March and August 2014, signalling slower economic momentum in early 2015. The decline was due to the US, where economic news has been surprising negatively, as forecast in a post in September.

Global real money expansion, however, rebounded strongly in late 2014, reaching a 38-month high in February. The global economy, therefore, should regain speed this summer and is likely to be growing at a rapid pace by late 2015. Again, the momentum change should be driven by the US, reflecting recent better monetary trends.

Second-half economic strength should be accompanied by a rebound in inflation, posing a risk to government bond markets. The six-month change in global consumer prices should stage a V-shaped recovery if oil and other commodity prices stabilise at current levels – second chart. This would probably pull down real money growth, in turn suggesting another economic slowdown in 2016. A fall in the gap between real money growth and output expansion, meanwhile, could imply less favourable liquidity conditions for equities later in 2015.

*Industrial output is preferred to GDP because it is more timely, less revised, available monthly and better correlated with equity market earnings.
**The February decline may have been exaggerated by the impact of bad weather and a ports strike in the US, and a late new year holiday in China.

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