UK money measures are showing signs of recovery but earlier weakness suggests a stagnant or contracting economy through Q1 2020.

Six-month growth rates of non-financial M1 and M4 rose further in September, reaching the highest levels since October 2018 and November 2017 respectively. The increase in real terms was magnified by a fall in six-month consumer price inflation – see first chart.

As elsewhere, monetary acceleration probably reflects declines in market interest rates through August. The recent back-up in yields threatens to stall the recovery.

Real narrow money growth remains weak by global standards, suggesting GDP underperformance – second chart.

The focus of concern here has been a contraction in corporate real money holdings earlier in 2019, suggesting that firms would cut jobs and investment. This scenario appears to be playing out: employment fell in the latest three months while last week’s CBI industrial survey reported a further collapse in investment intentions – third chart.

Corporate real M1 has resumed modest growth but is far from giving a positive signal – fourth chart. Recession avoidance depends on consumer resilience. Household real M1 growth has ticked up recently but labour market weakness and election-related policy uncertainty may drag on near-term spending.

Euroland money growth pulled back in September but not sufficiently to call into question the positive view of economic prospects here.

Non-financial M1 and M3 rose by 0.4% and 0.2% in September, the smallest monthly increases since June. Six-month growth rates of the two measures eased to the lowest since April and June respectively – see first chart.

The slowdown in real terms was tempered by a fall in six-month consumer price inflation (seasonally adjusted) – first chart. Six-month growth of real narrow and broad money remains within its year-to-date range and well up from 12 months ago – second chart.

Real narrow money is growing at a respectable pace across the big four economies, suggesting similar GDP growth prospects and no “weak links” – third chart.

The stockbuilding cycle has been a major drag on Euroland activity but is probably bottoming. The ECB’s Q3 bank lending survey, released last week, showed another large year-on-year fall in the net percentage of banks reporting stronger demand for inventory finance. The scale of the decline, and a small uptick from Q2, are consistent with a cycle low – fourth chart.

The survey reported broadly stable credit conditions, although more banks expect to tighten standards on loans to SMEs – fifth chart.

A turn in the stockbuilding cycle could trigger a sharp reversal of German industrial weakness. The October Ifo survey was hopeful, with the orders inflow balance positive for the first time since November 2018 and the finished goods stocks balance suggesting a slower pace of destocking – sixth chart.

The view here remains that the global stockbuilding or inventory cycle is bottoming in H2 2019, i.e. the impact of the cycle on global growth is about to shift from headwind to tailwind.

There is much confusion about this cycle. Inventory levels are still elevated, as evidenced, for example, by the business inventories to sales ratio in the US and a high proportion of Euroland firms reporting above-normal stocks. The consensus argues that production will be cut back to reduce the excess, depressing growth.

The growth impact of the cycle, however, depends not on whether inventories are rising or falling but whether they are doing so at a faster or slower pace. High inventories are usually associated with a rapid near-term rate of reduction. Soon after the peak, the pace starts to slow. The growth impact then moves from negative to positive, even though inventories are still above normal and may continue to decline for many more months.

Hard information on inventories is patchy, delayed and often revised significantly. A G7 survey-based indicator is used here to track the cycle and, as previously discussed, has reached a level consistent with a low.

An alternative, indirect way of monitoring the cycle relies on the tendency of firms to use short-term bank credit to finance inventory increases. In the US, banks’ commercial and industrial (C&I) loans surged in late 2018 / early 2019 when inventory accumulation was peaking but growth has since slumped – see first chart.

The annual change in three-month growth of C&I loans correlates with the impact of stockbuilding on the annual rate of change of GDP – second chart. The relationship suggests a significant negative contribution to annual GDP growth in Q3 2019, consistent with the cycle moving into a low.

One implication of a bottoming of the global stockbuilding cycle is that industrial commodity prices are likely to strengthen in 2020. The copper price, for example, has tended to weaken into cycle lows but pick up in the subsequent year – third chart.

The oil price has been depressed by rising US production as well as a weak global economy. Investment in new wells, however, appears to have fallen sharply in Q3, judging from industrial output data on well drilling – fourth chart. This could result in a decline in output in 2020, adding to upward pressure on the oil price from a turn in the stockbuilding cycle.

Slack is opening up in the UK labour market, strengthening the case for a rate cut regardless of Brexit developments.

Total hours worked (reported as a three-month moving sum) fell further in August and are down 0.5% from an April peak. This casts doubt on current official estimates showing monthly GDP rising above its prior February / March high in July / August.

Falls in employment and hours worked had been signalled by a downturn in vacancies, which peaked in January (three-month moving average). The decline continued in September, albeit at a slower pace, while redundancies in the three months to August were the highest since 2016 – see first chart.

The unemployment rate ticked up to 3.9% over June-August and would have risen by more but for a contraction of the labour force, reflecting an increase in “inactivity” – second chart.

Benefit claims data suggest a further pick-up. The old claimant count measure has been distorted by the roll-out of universal credit but the Department for Work and Pensions calculates an adjusted series, based on modelling what the count would have been if the current benefits system had been in place since 2013. This “alternative” count bottomed as long ago as February 2018, with a three-month increase of 43,000 in August the highest since inception – third chart.

Chinese September monetary numbers are a mixed bag but will probably be interpreted positively by the market.

The monthly flow of total social financing was above expectations, while six-month growth of the outstanding stock returned to its mid-year high – see first chart.

The bad news is that six-month narrow money growth fell back sharply. Note that the latest data point for true M1 incorporates an estimate of household demand deposits, which are released several days after the headline money numbers.

As the chart shows, growth rates of TSF and narrow money usually move in the same direction, making the September divergence difficult to interpret. The money numbers are more volatile, suggesting playing down the apparent negative signal and waiting to see if there is a rebound in October (or a relapse in TSF).

Broader money measures don’t help to clarify the issue. Six-month growth of headline M2 was slightly higher but growth of the preferred measure here, which excludes deposits of financial institutions, was unchanged after its recent fall, echoing the cautionary signal from narrow money – second chart.

From a longer-term perspective, money trends appeared to be responding to policy easing in early 2019 but the pick-up aborted after the failure of Baoshang Bank in May, which disrupted the interbank market and led to a reduction in credit supply to private firms. Consistent with this narrative, the corporate financing index from the Cheung Kong Graduate School of Business monthly survey reached a record high in April and plunged through August, recovering marginally in September – third chart.

Global six-month narrow money growth is estimated to have picked up significantly in September despite the disappointing Chinese number, mainly reflecting a US surge, part of which pre-dated the Fed’s repo operations – fourth and fifth charts.

The OECD’s leading indicators support the signal from monetary trends that global industrial momentum is probably bottoming but will remain weak into 2020.

The chart shows the six-month rate of change of a global leading indicator derived from the OECD’s country indicators for the G7 and major emerging economies. Turning points in this rate of change have led turning points in six-month industrial output momentum by five months on average historically.

The six-month leading indicator change bottomed in February, suggesting a Q3 low in industrial output momentum. This accords with the signal from six-month real narrow money growth, which bottomed in November 2019 and leads by nine months on average.

The growth rates of the leading indicator and real narrow money were still low in August, consistent with economic momentum remaining weak through January and May 2019 respectively. Real money growth, however, is expected to have picked up significantly in September – a preliminary estimate will be available by early next week.