As previously discussed, a fall in six-month global real narrow money expansion since November 2011 suggests a decline in six-month industrial output momentum from May 2012, allowing for the typical half-year lag. The level of real money growth, however, remains respectable, consistent with an economic slowdown rather than anything worse – see first chart.

Eurozone money supply figures for February released on 28 March will be important for confirming this assessment. The hope is that the ECB’s liquidity injections have stabilised the banking system and restored confidence, thereby improving spending prospects. Such a scenario should be reflected in a shift of funds into M1 deposits – a usual precursor of a recovery in economic activity. Faster Eurozone real M1 growth could compensate for a slowdown in the US, supporting the global measure at a level consistent with continued moderate economic expansion – second chart.

The optimistic scenario was dented by yesterday’s disappointing “flash” Eurozone PMI surveys for March – the key manufacturing new orders index fell to a three-month low. It is too early, however, for the positive effects of the ECB’s actions to show up in such surveys. The results, moreover, are at odds with a continued improvement in the balance of equity analysts’ earnings upgrades and downgrades, suggesting a PMI rebound next month – third chart.

Posts since 2009 have argued that the late 1970s provides a template for the current global economic cycle. The fourth chart updates a comparison of six-month industrial output expansion across the two periods, demonstrating a similar “pulse”, with recent economic acceleration occurring on schedule. The suggestion is that momentum will peak in mid 2012 and slow into 2013, while remaining positive – consistent with the current message of the monetary data.

A February post suggested that Chinese economic data would show renewed weakness, based on soft monetary trends and a downturn in leading indicators. The forecast receives support from today’s Markit “flash” manufacturing PMI survey for March, showing a fall in the key new orders index to its lowest level since November – see first chart.

The authorities need to accelerate policy easing to avert the risk of a “hard landing”. Repo rates have fallen recently, which may presage another cut in the system-wide required reserves ratio or even official interest rates – second chart. (The reserves ratio was reduced yesterday for selected branches of the Agricultural Bank of China.)

Policy-makers, however, may be cautious ahead of the March CPI inflation release, which may show a rebound from February’s 3.2% print due to New Year timing effects and recent firmer food prices – third chart.

The measures announced are disappointing relative to the billing as a tax-reforming Budget that will lift growth.

A tax-reforming Budget would have slashed marginal rates for the majority of tax-payers to boost incentives to work, save and invest. The rise in the personal allowance is welcome but cuts the marginal rates of no more than 7% of taxpayers (i.e. two million out of 30 million). The offsetting reduction in the basic rate limit, moreover, implies that more earners will be drawn into the 40% band. The cut in the top rate to 45%, meanwhile, affects only 300,000.

A tax-reforming Budget would also have tackled unwelcome humps in marginal rates associated with plans to withdraw child benefit from higher-rate taxpayers and the withdrawal of the personal allowance above £100,000.

The main growth-boosting measure is a faster cut in corporation tax to 22% by 2014-15 but the change is marginal and unlikely to have a major impact on business confidence and investment.

Within the details, there is a large element of robbing Peter to pay Peter. The cost of the corporation tax cut, for example, is exceeded by increases in other business revenues, stemming from a higher bank levy, changes to North Sea taxation and controlled foreign company rules. The rise in the personal allowance, meanwhile, is partly paid for by freezing age-related allowances and extending VAT.

The OBR’s fiscal forecasts are little changed from November but its assessment that the Chancellor is on track to meet his targets assumes that plans to step up spending restraint will be achieved. Government actions cut the deficit by £41 billion in 2010-11 and 2011-12 combined, split between £23 billion of expenditure reductions and £18 billion of tax hikes (Budget table 1.2). A further £41 billion adjustment is planned for the next two years but with spending cuts bearing much more of the burden – £34 billion versus tax rises of only £7 billion.

The scale of the challenge that lies ahead is also highlighted by the OBR’s forecasts for cyclically-adjusted borrowing (excluding the impact of the Royal Mail transfer), showing cuts stepping up from 0.6% and 0.7% of GDP in 2011-12 and 2012-13 to 1.6% and 1.2% in 2013-14 and 2014-15 (Budget table D.6). Backloading the adjustment until near the planned date of the next election is an odd strategy for a supposedly politically-attuned Chancellor.

Disappointing February figures support the forecast here that UK CPI inflation will remain comfortably above the 2% target throughout 2012.

The annual CPI increase subsided from 3.6% in January to 3.4% but a larger decline had been expected, reflecting slower energy and food price gains and a favourable VAT base effect – consumer suppliers were probably still passing on the 2.5 percentage point standard rate rise in February last year.

The disappointment is highlighted by an estimate of “core” prices that excludes unprocessed food and energy and attempts to adjust for VAT changes – the calculation assumes that 90% of last year’s standard rate rise was passed on to consumers, with the effect spread over October 2010-February 2011. Annual inflation on this measure rose to a 26-month high of 2.9%, with six-month seasonally-adjusted momentum even stronger – see first chart.

These developments cast strong doubt on the Bank of England’s continued assertion that substantial excess capacity in the economy will bear down on core inflation.

Further evidence of inflationary risks was provided yesterday by the March CBI industrial trends survey, showing a jump in price-raising plans, in turn suggesting a rebound in annual CPI goods inflation – second chart.

The chart updates a comparison of the rise in the Dow Jones industrial average from its low on 9 March 2009 with recoveries after six prior bear markets of a similar scale to the 2007-09 decline. A post in February gave further details but the analysis involved:

1)    Identifying twentieth-century stock market falls comparable with the 54% decline between October 2007 and March 2009.
2)    Aligning the trough of each identified bear market with the March 2009 low and tracing out the subsequent recovery.
3)    Calculating a mean of these levels at each point in time to generate a “six-recovery average” path, with which to compare the current advance.

The Dow has moved even further above the six-recovery average since February, with the premium standing at 21% as of Friday’s close.

One of the six prior recoveries involved stronger stock prices at this stage – the recovery after the November 1903 low. This precedent is not encouraging since stocks soon after embarked on another bear decline into a low in November 1907.

The current Dow reading, indeed, is above the mid 2012 levels of all six prior recoveries.

The predictive value of such comparisons is moot but the suggestion that stocks will decline by mid 2012 is consistent with the monetary forecast of a peak in global growth in May – see Friday’s post. As noted there, however, it may be premature to position defensively until a growth peak is confirmed by leading indicators and “excess” liquidity gives a “sell” signal.