A surprise August drop in global industrial output contributed to current market growth worries but incoming September data suggest a strong rebound.

Two countries in the G7 plus emerging E7 aggregate monitored here have so far reported for September: the US and Russia. Output rose by a stronger-than-expected 1.0% on the month in both cases, more than reversing August falls of 0.2% and 0.3% respectively*.

Outside this group, Polish industrial output rebounded 1.4% last month, also beating market forecasts.

Germany last week reported a 4.0% August output drop but this followed a 1.6% gain in July. The numbers have been heavily distorted by holiday timing effects in the auto sector – car production surged 25% in July before slumping 28% in August. Car output rebounded 19% in September, suggesting that industrial production will reverse most of its August drop – see chart.

Japanese industrial output fell by 1.9% in August but manufacturers’ polled at the time the report was compiled expected production to surge by 6.0% in September. Their forecasts have been consistently too optimistic in recent months but the August loss, at a minimum, should be regained.

China has the largest weight in the G7 plus E7 aggregate and reports September production on Tuesday 21 October. Recent output growth has been lower than suggested by official and Markit manufacturing purchasing managers' surveys, while a rise in September exports is hopeful.

*All numbers seasonally adjusted. Own adjustment of Russian / Polish industrial output and German car output using X12.

Global six-month real narrow money growth – the key forecasting indicator monitored here – appears to have partially reversed a sharp August fall in September, based on data covering 60% of the aggregate. The recent behaviour of the indicator suggests that industrial output growth will rebound near-term before declining again from early 2015.

Real narrow money growth fell during the second half of 2013, correctly signalling an economic slowdown during the first half of 2014 – see chart. It revived in early 2014, however, resulting in a forecast here of a recovery in economic momentum from the summer, based on an average half-year lead from money to activity. Economic weakness, instead, has extended, with six-month industrial output growth falling to a 21-month low in August. This extension is consistent with normal variation in the money / activity lead time.

Real narrow money growth remained solid through July but dropped sharply in August. The preliminary data suggest that it remained well below the first-half average in September.

To summarise, real money trends do not support market fears that the global economy is sliding into another recession. Such a scenario would require that 1) the rise in real money growth in early 2014 was a false signal and will not be reflected in a near-term recovery in output growth and 2) the economy will enter a recession without a prior real money contraction – historically a rare occurrence.

As stated in a post last week, the expectation of a recovery in output growth will be maintained unless real money expansion or the longer leading indicator tracked here weaken further. The leading indicator was little changed in August while an energy-driven fall in inflation will support real money growth near term.