A February update of the OECD’s leading indicators is due next week*. Calculations here suggest that the G7 composite indicator fell further, signalling a continuation of below-trend GDP expansion – see first chart. This could temper market optimism that global economic weakness is starting to abate, following a boost to such hopes from this week’s stronger-than-expected Chinese PMI results.

With regard to the latter, some caution is in order. Official (NBS) manufacturing PMI survey results, though supposedly seasonally adjusted, tend to strengthen in March. The new orders index, for example, rose from 50.6 to 51.6 last month but the average March increase over 2010-18 was 1.9 points. The index fell in only one of the nine years.

The second chart compares the published data with the output of a standard seasonal adjustment programme. The double-adjusted series was little changed last month and below the published level.

The procedure used does not adjust for the changing date of the Lunar New Year holiday. Timings were similar to 2018 / 2019 in 2015 / 2016. The published series rose from 48.6 to 51.4 between February and March 2016 but fell slightly in each of the next four months, reaching 50.4 in July. Policy was being eased in late 2015 / early 2016 and narrow money growth was much stronger than now.

A sceptical view of the China reflation story will be maintained here pending a convincing acceleration in narrow money. Even if upcoming March numbers confirm such a pick-up, a significant recovery in economic momentum may be delayed until late 2019.

*The February indicators incorporate component data through March, where available.

UK top-line monetary growth rates were little changed in February but sectoral details show that the six-month change in narrow money (M1) holdings of private non-financial corporations (PNFCs) turned negative in inflation-adjusted terms. Such a development historically has preceded business retrenchment and a slowdown or contraction in aggregate economic activity. With GDP growth already weak, even a slowdown would imply economic stagnation, at best.

The first chart shows two-quarter / six-month changes in GDP and real (CPI-deflated) non-financial M1, along with the household / corporate breakdown of the latter. The three monetary series have been supported by a sharp fall in six-month inflation since September but this is about to go into reverse, reflecting rising vehicle fuel prices and the planned lifting in April of the price cap on household energy bills. Despite the favourable inflation effect, real non-financial M1 growth has remained weak while corporate real M1 holdings have contracted.

Corporate M1 fell in nominal as well as real terms in the four months to February. Corporate broad money (M4) trends have also weakened, with six-month nominal growth down to 0.9% in February, implying near-stagnation in real terms. M1 and M4 holdings fell by 0.6% and 0.2% respectively in February alone.

The relative resilience of household money trends is of limited consolation, for two reasons. First, corporate developments often lead household trends, e.g. the six-month change in real PNFC M1 turned negative six months before that of real household M1 ahead of the 2008-09 recession – first chart. Business retrenchment feeds through to slower growth of worker incomes, with negative implications for consumer spending unless offset by timely policy stimulus.

Secondly, household money trends have been boosted by a portfolio shift out of mutual funds – outflows from retail funds may have totalled about £6 billion in the six months to February, based on extrapolating Investment Association data through January, following inflows of £7.5 billion in the prior six months. This shift into money is unlikely to signal a rise in spending intentions. The second chart shows two-quarter / six-month changes in consumer spending, real household M1 / M4 and an expanded real savings aggregate also including holdings of National Savings and mutual funds (“M4++”). The weakness of the latter measure may be a better guide to spending prospects.