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What's money telling us?

The message from global money supply figures is that global GDP growth could slow in the second half of 2019

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 in 2018-19. Current rates of monetary expansion are not consistent with an acceleration in economic growth – quite the opposite in fact.

Across the globe the message from the supply of broad money is that rates of growth are either slow or slowing.

In the UK M4x broad money supply growth slowed to 4.5% (yr-on-yr) in February, from 5.1% (yr-on-yr) in January.

In the Euro-zone broad money supply M3 growth slipped to 4.2% (yr-on-yr) in February, down from (a revised down) 4.5% (yr-on-yr) in January and 4.6% (yr-on-yr) in December.

The ECB’s progressive withdrawal of monetary stimulus, from 80 billion to 30 billion euros per month has taken its toll. The euro zone economy is still without escape velocity i.e. the capability for the commercial banks to take over from the central bank in funding economic recovery. The impact of QE in the euro-zone looks much more like the experience of Japan than in the US. Instead of kick-starting recovery it has been more limited in its impact - preventing the euro crisis from being far worse in 2016-17.

Further east, M2 money supply growth in Japan slipped to 3.3% (yr-on-yr) in February, from 3.4% (yr-on-yr) in January, and a 4% (yr-on-yr) average through the second half of last year.

The 2 largest economies in the world provide both reassurance and concern. US broad money supply M3 growth is chugging along at around 5% (yr-on-yr).

Steady growth of this magnitude is OK, 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% (yr-on-yr) in February, down from 10% (yr-on-yr) 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, at Henderson Janus, uses the six-month growth rate of real (inflation adjusted) narrow money in the G7 and E7 (7 large emerging economies) as a global leading indicator. Historically, this has led turning points in economic growth by nine months on average.

Latest figures show G7 plus E7 six-month real narrow money growth fell to a 9 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 strewn with risk. But the very wide geographical coverage, from the euro-zone to China and Japan, and the combination of both broad and narrow measures of money, suggests that global GDP growth and/or inflation will undershoot expectations.