A post in early December suggested that equities were at risk from a deteriorating liquidity backdrop. This warning was premature – global stocks reached a new post-recession high at end-2013 – but a sharp decline over the last week has pushed the MSCI World index to the bottom of its range since mid-October – see first chart.

The focus here is on the gap between global* six-month real (i.e. inflation-adjusted) money supply expansion and industrial output growth. This was mostly positive and large over 2011-13, suggesting the availability of “excess” liquidity to power asset price inflation. Stronger economic growth coupled with a minor slowdown in real money expansion, however, resulted in the gap closing in November 2013 – second chart.

Liquidity concerns have been partially alleviated by December monetary data, suggesting a rebound in global real money expansion**. Industrial output probably accelerated further last month but the real money / output growth gap may have remained close to zero. The liquidity backdrop, in other words, is currently neutral rather than negative.

The estimated December rise in global real money expansion partly reflects recoveries in China and India, which lifted the emerging E7 component – third chart. Current financial pressures could reverse the E7 pick-up but the suggestion is that emerging economies in aggregate will perform respectably through mid-2014, at least.

*G7 plus emerging E7.
**The final result will depend importantly on Eurozone data released tomorrow.