Eurozone April money numbers were solid, suggesting that the current economic upswing will extend into late 2015.

Narrow money M1, the broader M3 measure and bank loans to the private sector (adjusted for securitisations) rose by 0.7%, 0.7% and 0.2% respectively last month. Six-month growth of M1 was marginally lower than in March but that of M3 and loans rose again, in the former case to a new post-crisis high – see first chart.

In real terms, six-month expansion of the three measures has moved sideways since January, reflecting a recovery in consumer price momentum. Real M1 is a better leading indicator of economic activity than M3 while bank lending is coincident / lagging. Strong real M1 growth suggests that six-month industrial output expansion will rise further over the summer before levelling off later in 2015 – second chart.

Narrow money trends are also informative about country economic prospects. Growth of real M1 deposits remains higher in France than in Germany and Italy, suggesting greater potential for French economic news to surprise positively. Spain, meanwhile, is showing renewed strength, reducing the risk for the incumbent PP of an economic slowdown before the election later this year – third chart.

The narrow money signal is positive in all countries bar Portugal, where it is neutral, and Greece, where it is increasingly negative, signalling a deepening recession – fourth chart. The turnaround in Greek monetary conditions since late 2014 reflects the confidence-destroying actions of the Syriza-led government and associated capital flight; it cannot be blamed on lack of ECB support or externally-imposed “austerity”.

Price information in today’s revised UK GDP report suggests that domestically-generated inflation has picked up and is running above 2%.

GDP growth in the first quarter of 2015 was unrevised at 0.3%, with strong domestic demand offset by a large trade drag. The demand surge was partly due to inventories but this is not necessarily a negative for future expansion – firms may have stocked up in correct anticipation of a post-election rise in final spending.

Price information in the report has received less attention but is potentially more significant. The annual rise in the deflator for gross value added (GVA) – a measure of prices of domestically-produced goods and services before indirect taxes and subsidies – increased to 2.2%, the highest since the second quarter of 2013.

The GVA deflator, moreover, has been held down recently by the falling value of North Sea oil and gas output. The deflator excluding oil and gas rose by 2.7% in the year to the first quarter, the strongest annual gain since the second quarter of 2009 – see chart.

There is, in addition, a question mark about the deflator for government consumption, which is reported to have fallen by 0.8% in the year to the first quarter, despite public sector average earnings growth of 1.3%*. Excluding government consumption, the GDP deflator rose by an annual 2.5% last quarter. (The GDP deflator includes the impact of indirect taxes / subsidies.)

The rise in domestic inflation is consistent with faster monetary expansion since late 2011, allowing for the normal long lead from money to prices. The impact on CPI inflation has been swamped by commodity price weakness and sterling strength but a rapid rebound is likely in late 2015 and 2016 as these drags fade.

*Excluding public sector banks.

Researchers at the San Francisco Fed claim that US GDP seasonal adjustments are faulty and the economy grew by 1.8% at an annualised rate in the first quarter, rather than the reported 0.2%. Since unusually bad weather probably depressed performance, this could be taken to imply that the recent US slowdown is more apparent than real. Such an interpretation, however, would be unwise, for several reasons.

First, the official 0.2% growth estimate is likely to be revised down, based on subsequently-released data. The consensus expects a fall to -0.8%, suggesting “true” growth of only 0.8%, using the San Francisco Fed seasonal adjustment. (The revised number is due for release on Friday.)

Secondly, the Fed analysis is open to question. The corrected GDP numbers are obtained by applying a second seasonal adjustment to the official data. The results, however, are sensitive to the choice of statistical filter. The researchers use the standard X12-ARIMA procedure without adjustments. If allowance is also made for Easter / leap year effects, the double correction has a much smaller impact: first-quarter growth, for example, is estimated at 0.6% – see first chart.


Thirdly, the recent economic slowdown is consistent with monetary trends. A post in September noted that US real narrow money growth had fallen sharply and was signalling weaker economic data in early 2015. This fall has since reversed, suggesting that the US economy will reaccelerate strongly in the second half – second chart.


US economic weakness, therefore, is genuine but is likely to prove temporary.

Applying the Fed analysis to UK GDP data, incidentally, does not suggest a significant seasonal adjustment problem: double-adjusted numbers are closer to the official series than in the US – third chart.

Japanese monetary trends suggest continued solid if unspectacular economic growth through late 2015.

GDP rose by 2.4% annualised in the first quarter versus a downwardly-revised 1.1% in the fourth quarter (previously 1.5%). The pessimistic spin is that, from the demand side, most of the growth last quarter was arithmetically due to the inventory component. This positive contribution, however, reflected a reduced rate of destocking rather than an accumulation of inventories, so is unlikely to imply a drag on future growth.

The economic recovery was signalled by monetary trends, with six-month growth of real narrow and broad money returning to a healthy level last autumn, stabilising more recently  – see first chart.

Monetary trends typically precede economic activity by about six months but the lead-time was shorter in 2014, probably because real money developments were dominated by changes in the price level rather than swings in nominal growth. The six-month change in real money was pushed negative by the April 2014 sales tax hike, rebounding in October when this dropped out of the inflation calculation – second chart.

Current monetary trends suggest respectable economic expansion through late 2015 but real narrow money growth is lower in Japan than in the US and Eurozone – third chart.

The forecast here of stronger global growth during the second half of 2015 suggests that business surveys will shortly turn more upbeat. Equity analysts’ earnings revisions correlate with survey trends and are improving on schedule.

The earnings revisions ratio is the number of analyst earnings upgrades minus downgrades, expressed as a proportion of the total number of estimates. The global revisions ratio (i.e. covering the constituents of the MSCI World index) rose to its highest level since December this month, an improvement that may be echoed in Markit “flash” manufacturing purchasing managers’ surveys released on Thursday – see first chart.

Yesterday’s post noted that monetary trends in China are signalling a modest growth revival. The Chinese revisions ratio also strengthened in May – second chart.

The upturn in the global longer leading indicator calculated here – see previous post – is corroborated by an alternative indicator compiled by the New York-based Economic Cycle Research Institute (ECRI). Its website commentary states that “the long leading index has turned up, and the coincident index is starting to follow suit, with the revival being led by economies where exchange rate weakness is acting as a tailwind (Japan and the Eurozone), while being less evident in the US where dollar strength is a headwind” – see here.

The Chinese economy remained weak in April but narrow money trends suggest a modest growth pick-up during the second half of the year.

The preferred measure of economic momentum here is the six-month change in industrial output*. This fell to just 1.6%, or 3.2% annualised, in March / April – the lowest since March 2009 and compared with average growth of 10.5% per annum in the five years to end-2014.

The extent of the slowdown was not clearly signalled by the official M2 and M1 money supply measures. Six-month growth of real (i.e. inflation-adjusted) M2 fell during the second half of 2014 but remained above its level in 2011, when the economy was significantly stronger than currently. Real M1 did warn of weakness, contracting in late 2014, but similar declines in 2012 and 2013 were not followed by falls in economic growth on the recent scale – see first chart.

The patchy forecasting performance of the official M1 measure reflects a flaw in its construction. M1 is conventionally defined as currency in circulation plus demand deposits. The Chinese measure, however, includes only demand deposits of corporations. This is a major deficiency at a time when policy is attempting to promote consumption- rather than investment-led growth.

The solution adopted here was to add a PBoC series for household demand deposits to official M1 to generate a “true” M1 measure. As expected, this performs better as a forecasting indicator. In particular, real “true” M1 contracted in late 2014, correctly warning of the recent slowdown, but did not give a similar negative signal in 2012 and 2013, when growth proved more resilient – second chart.

The six-month change in real “true” M1 has been volatile in recent months but averaged 1.8% (not annualised) over January-April, versus -0.1% in the last four months of 2014. This revival should be reflected in a recovery in economic growth over the summer / autumn.

*World Bank seasonally-adjusted index.