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Money matters

How do you spot turning points in the economy? Broad money growth is a much neglected leading economic indicator.

In  2018 I wrote: "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 2019. Current rates of monetary expansion are not consistent with an acceleration in economic growth – quite the opposite in fact". 

Across the globe in 2018 the message from the supply of broad money was that rates of GDP growth were likely to slow in 2019. In the US and the Euro-zone rates of broad money growth were below 5 percent. In Japan and the UK broad money growth was sliding towards 3 percent. But this message was being ignored by financial markets due to their historic failing to focus sufficiently on money. Instead, financial markets were focused on the end of quantitative easing and the scale and speed of prospective interest rate rises.

So just when everybody was talking about how much tighter monetary policy would have to become, broad money growth was saying the opposite: "Hold on a minute the economy might be weakening not strengthening". Needless to say, this message was largely ignored and policy tightening continued, albeit slowly. 

More than a year later, the slowdown in the US and global economy has seen conventional sentiment reverse, with heightened perception of the risk of recession in the US - associated with the inversion of the yield curve and the likelihood that the longest US economic expansion on record is about to end. 

But just as the market consensus missed the 2019 economic slowdown in advance, because of its failure to look at broad money growth, could it be wrong again?

Over recent months US broad money supply growth has shifted. Latest figures show the year-on-year rate of broad money M3 growth in the US at around 6 percent, but the annualised rate of growth in the latest three month period has shot up to 10.2 percent. If sustained, 10 percent growth in the money supply in the second half of 2019 provides very strong grounds for discounting the prospect of a recession in 2020. 

A different economy but the same problem - just when the ECB re-introduces quantitative easing the latest Euro-zone broad money supply growth statistics show an acceleration from 4.5 percent (year-on-year) in June to 5.2 percent (year-on-year) in July. Again, the annualised rate of growth in the latest 3 month period was stronger still at 6.6 percent. These are not rates of broad money growth associated with recessions.

Alas UK broad money supply growth is not so reassuring. For all of 2019 broad money growth in the UK has been below 3 percent (year-on-year). Only in the latest figures has it edged just above 3 percent (year-on-year). In 2016 in the aftermath of the EU referendum the consensus view was that the economy could fall into recession. This was just as broad money growth was accelerating towards 8 percent (year-on-year). Unsurprisingly, given the pace of monetary growth, the recession never happened. My concern now is the opposite, that whilst markets were overly pessimistic in 2016 because they didn't focus on monetary growth, they could be too complacent about the 2020 outlook because of the same error. What does this tell us? There could well be a rate cut (and even an expansion of QE) in the UK before the end of the year, if current rates of monetary growth don't improve.