Monday’s post argued that a positive view of the global economic cycle should be maintained until either global real narrow money expansion slows further or the longer leading indicator calculated here turns down. Available monetary data suggest that six-month growth of G7 plus E7 real narrow money rose in August, partially reversing a decline in June / July – see chart.

August statistics have been released by the US, Japan, China, India and Brazil, together accounting for about 60% of the G7 plus E7 aggregate. The recovery in growth was entirely due a rebound in Chinese real M1 following weakness in July – see Tuesday’s post. The final August reading will depend importantly on Eurozone data, released on 26 September.

Slightly weaker real money expansion since the spring suggests that global economic growth will moderate around year-end, while remaining respectable – a benign scenario, in theory, for markets.

Construction and industrial output figures released this week confirm that both sectors started the third quarter strongly while suggesting that second-quarter GDP growth will be revised up from 0.7% to 0.8%.

Construction output in July was 1.4% above the second-quarter level, while industrial production was 0.9% higher. Even assuming no further increase in August and September, the two sectors would contribute 0.2 percentage points to third-quarter growth, based on GDP weights of 6% and 14% respectively.

Second-quarter growth was estimated at 0.72% in the last GDP report but increases in construction and industrial output have since been revised up by 0.5 and 0.1 percentage points respectively. The combined impact on GDP growth is 4 basis points – sufficient to push it up to 0.76%, or 0.8% after rounding, assuming no change in the current estimate of services expansion. Services output may also be revised up, reflecting the normal tendency for statisticians initially to underestimate activity in economic upswings.

The improvement in construction prospects was underlined by a 19.7% surge in new orders in the second quarter, suggesting that new construction output will return to 2010-11 levels – see chart. This would entail a rise of about 10% from the second quarter, implying a GDP boost of 0.4%, based on the 4% weight of new construction (with repairs and maintenance accounting for the remaining 2 percentage points of the total 6% weight of construction).

Today’s strong labour market numbers support the forecast here that the unemployment rate will fall beneath the MPC’s “threshold” by mid-2014. They also imply that productivity performance remains disappointingly weak.

The labour force survey (LFS) measure of the unemployment rate fell to 7.7% (7.69% before rounding) in the three months to July from 7.8% in the prior three months. LFS unemployment needs to decline by 20,000 per month for the rate to breach 7.0% by mid-2014. This looks eminently achievable: claimant-count unemployment leads the LFS measure and fell by 33,000 per month in the three months to August.

LFS employment has been growing solidly but, in addition, there has been a substitution of full- for part-time jobs. Aggregate hours worked, therefore, rose by 0.8% in the three months to July from the prior three months. With GDP currently estimated to have increased by 0.7% in the second quarter, the suggestion is that output per hour is continuing to slip – at odds with the MPC’s view that productivity performance would recover as the economy strengthened.

A post in June expressed modest optimism about Chinese economic prospects. August data confirm that activity has firmed: six-month growth in industrial output rose to 5.4% (not annualised) from a recent low of 3.3% in April.

Monetary trends, however, caution against extrapolating this improvement. Six-month rates of change of real M1 and M2 recovered in August but remain lower than in the spring – see chart. Real bank lending has been growing faster but has been boosted by “reintermediation” due to a clampdown on off-balance-sheet and non-bank credit; real social financing – a broad credit measure – has slowed.

A stronger global economy should support exports and industrial activity over the remainder of 2013 but sluggish monetary trends suggest subdued domestic demand and moderate overall expansion.

The approach to forecasting the global economic cycle employed here relies primarily on an analysis of monetary trends but seeks confirmation for monetary signals from short- and longer-term composite leading indicators. July indicator readings are upbeat, suggesting that the global economy will expand solidly through end-2013 (at least).

The global leading indicators are derived from the OECD’s country leading indices, which combine information on economic and financial series that tend to move ahead of demand and output. The composition of the indices differs by country; the US index, for example, includes business and consumer survey responses, housing starts, new orders, weekly hours, share prices and the yield curve.

The OECD country-level data are aggregated and transformed to produce short- and longer-term leading indicators that have led turning points in global industrial output growth by an average of three and five months respectively in recent years.

The longer-term leading indicator has recovered from a recent low in March 2013, rising further in July – see first chart. Assuming a five-month lead, this suggests a pick-up in global industrial output expansion between August and December. The pick-up may have started a month early in July, based on available data – first chart.

This positive message has now been confirmed by the short-term leading indicator, which rose for a second month in July.

A previous post noted that global real narrow money expansion slowed in June and July, suggesting a moderation in economic momentum at end-2013, allowing for a typical six-month lead. The July decline in real money growth, however, was smaller than initially estimated* and reflected a sharp fall in China – data this week may show that this partially reversed in August. Global monetary trends, in other words, are not yet clearly deteriorating.

The judgement here on the global economic cycle will remain positive pending a more significant slowdown in global real money expansion and / or a decline in the longer-term leading indicator. An early estimate of August real money growth will be available later this week.

Interestingly, the rise in the longer-term leading indicator in June and July was driven by the E7 component – second chart. This suggests that, despite a recent tightening of financial conditions in several countries, the outlook for emerging economies in aggregate has improved, probably reflecting stronger G7 import demand**.

*The current estimate includes July data for all included countries except Korea.
**This suggestion is not supported by the OECD’s commentary on its leading indices, referring to weaker growth in China and India; the information extracted here, however, is often at odds with the OECD’s interpretation of its data.