Expectations of global growth are overinflated
There's a rumble in the jungle, but not everyone has heard it. For those with their ear to the ground, the drumbeat of weakening broad money growth can be heard. And the rumble could have profound implications for the global economic outlook.
Current rates of monetary expansion are not consistent with acceleration in economic growth.
Across the globe, the message from broad money is that rates of growth are either slow or slowing.
In the UK, growth of the M4x – which measures the money supply in the country – slowed to an annual rate of 4.5 per cent in February, from 5.1 per cent in January.
In the Eurozone, broad money supply M3 slipped to 4.2 per cent in February, down from 4.5 per cent in January, and 4.6 per cent in December.
The European Central Banks progressive withdrawal of monetary stimulus to €30bn per month from €80bn has taken its toll.
The Eurozone economy is still without escape velocity – that is, the commercial banks are not yet capable of taking over from the central bank in funding economic recovery. The impact of QE in the Eurozone looks much more like the experience of Japan than in the US. Instead of kickstarting recovery, the impact has been limited – merely preventing the euro crisis from worsening back in 2016.
Further east, money supply growth in Japan (M2) slipped to an annual rate of 3.3 per cent in February, from 3.4 per cent in January, with a four per cent average through the second half of last year.
The two largest economies in the world provide both reassurance and concern. US broad money supply M3 growth is chugging along at around five per cent.
Steady growth of this magnitude is okay, but nothing to get excited about. The expansion in broad money supply is signalling that any acceleration in US economic growth this year is likely to be moderate.
It is quite likely that balance sheet reduction by the Federal Reserve will offset any stimulus to monetary growth from recent tax cuts.
Chinese monetary growth was 8.8 per cent in February, down from 10 per cent a year ago, as the authorities attempt to bring the previous explosion in debt and the shadow-banking sector under control. The risk, of course, is that China could fall into a debt deflation scenario with much weaker monetary growth.
Moreover, it is not just broad money supply that is signalling a potential deceleration in global growth.
Simon Ward from asset management giant Janus Henderson uses the six-month growth rate of real (inflation adjusted) narrow money in the G7, and the seven large emerging economies that make up the E7, as a global leading indicator.
Historically, this has led turning points in economic growth by nine months on average.
Latest figures show that G7 plus E7 six-month real narrow money growth fell to a nine year low in February.
The message from money is that the global economy will begin to weaken, not strengthen, over the coming months. As yet, the warning lights are flashing amber not red. The money numbers can be volatile and extrapolating from just a few months is fraught with risk. But the very wide geographical coverage, from the Eurozone to China and Japan, and the combination of both broad and narrow measures of money, suggest that global GDP growth and inflation will undershoot expectations.