Narrow money trends suggest that the UK economy will continue to grow solidly in the first half of 2014 while Eurozone expansion will revive further.

The first chart compares six-month growth rates of real (i.e. inflation-adjusted) narrow money in the major developed economies. The measure used for the UK and Eurozone is “non-financial M1”, comprising currency and sight deposit holdings of households and non-financial corporations – ECB research has confirmed that this measure is the best monetary leading indicator of the cycle. Headline M1 is shown for Japan but this is already a non-financial measure, since the “money holding sector” is defined to exclude financial corporations. The US monthly monetary statistics do not provide a breakdown between sectors – the chart shows narrow M1, comprising currency and demand deposits.

Real narrow money growth picked up across Europe during the second half of 2012 and first half of 2013 but was particularly strong in the UK, correctly signalling recent economic outperformance. The UK trend has stabilised since the spring at a robust level; Eurozone expansion had also flattened out but rose to a new high in November, probably partly reflecting the ECB’s interest rate cut that month. This suggests that the UK / Eurozone economic growth gap will narrow during the first half as the latter strengthens.

Japanese real money expansion remains disappointing, with recent faster nominal gains neutralised by higher inflation. US growth is respectable by international standards but has trended lower over the last year, casting doubt on forecasts of faster economic expansion during 2014.

Eurozone pessimists cite continued weakness in broad money and credit. The view here is that this is not an immediate constraint on the recovery because lower interest rates and reviving confidence are causing households and firms to use existing monetary resources more intensively – rising velocity, in other words, is compensating for slow broad money expansion. The pick-up in narrow money is indirect evidence of this shift.

The recent further rise in Eurozone real money growth has been led by the periphery, with Italy rebounding strongly from summer weakness and Spain also now above Germany and France – second chart.

The Santa rally finally arrived: global equities, as measured by the MSCI All Country World index in US dollars, were up by 1.2% from their end-November level as of Friday’s close, and only 4.9% below the all-time high reached in October 2007.

The recent advance, however, reflects gains in a decreasing number of markets. The chart shows the MSCI index together with a breadth measure derived by calculating the percentage of the 44 MSCI constituent countries that rise each week and smoothing this percentage using a 13-week moving average.

The breadth measure peaked in September, at a lower level than a previous high in February. It has failed to recover much recently despite the further rise in the World index.

A similar divergence between index performance and breadth occurred before the 2007-09 bear market and corrections in 2010 and 2011.

Declining country breadth may be a sign that liquidity conditions are deteriorating. Global six-month real narrow money expansion appears to have crossed beneath industrial output growth in November – a shortfall last existed in early 2011. With “excess” liquidity eliminated, price gains for particular assets may depend on diverting funds from other markets, which suffer corresponding weakness.