Global economic momentum is reviving, consistent with a forecast based on monetary trends, which continue to give a reassuring message.

The monetary measure used for forecasting here is the six-month change in global real narrow money, with “global” defined as the G7 plus seven large emerging economies (the “E7”). Statistical testing shows that this leads the six-month change in industrial output by nine months on average. Turning points in industrial output growth, meanwhile, usually coincide with those in GDP growth.

Real narrow money growth strengthened around end-2014, suggesting a pick-up in industrial output momentum during the second half of 2015. Output has been weaker than expected but the six-month change bottomed in June and appears to have returned to positive territory in September, judging from partial data – see first chart. GDP has been more resilient than industrial output this year, reflecting services strength.

Real narrow money growth moderated over the spring and early summer but has bounced back in August / September, offering reassurance that the global economy will perform respectably in the first half of 2016 – first chart.

The view that the global economy is lifting is supported by news this week, including stronger Japanese / Taiwanese exports in September and upbeat October “flash” PMIs for the Eurozone and Japan. The October Chinese MNI business survey was also stronger.

The rise in global real narrow money growth in August / September mainly reflects a surge in China, discussed in several recent posts, most recently on Monday. With China accounting for about half of the E7, this surge has resulted in real money growth in the E7 crossing above that in the G7 – second chart.

In addition to the re-emergence of a positive gap with the G7, the available September data suggest that E7 six-month real money growth has risen above the 4% level historically associated with emerging market equities outperforming developed markets – see previous post.

Today’s batch of Chinese economic data contains grist for both optimists and pessimists. Bears will focus on a further slide in annual nominal GDP growth to 6.2% in the third quarter – below a 6.5% trough reached during the 2008-09 downturn. Real GDP growth was maintained at a solid 6.9% only via an annual fall in prices, as measured by the GDP deflator.

Bulls, however, can point to improvements in monthly data to argue that stimulus efforts are starting to bear fruit. Six-month growth of industrial output and real retail sales rose further in September – see first chart. Housing floorspace started registered its first year-on-year gain this year. The annual change in auto sales also returned to positive territory. Government spending, meanwhile, rose 27% from September 2014.

These positive signs are consistent with a recovery in real narrow money growth since early 2015. The PBOC released additional monetary data for September today, allowing calculation of the “true M1” measure followed here. Six-month growth of real (i.e. CPI-adjusted) true M1 surged to its highest level since 2010, suggesting a further acceleration in industrial output and other activity measures into early 2016 – first chart.

Recent intervention to support the renminbi, meanwhile, may have been larger than current market estimates. Foreign exchange reserves were earlier reported to have fallen by $180 billion during the third quarter but this figure mixes valuation effects with transactions. The transactions element is separated out in the balance of payments accounts but these have yet to be released for the third quarter. The transactions series, however, correlates closely with the change in financial institutions' “position for forex purchase”, which fell by 1.73 trillion yuan, or $275 billion, last quarter – second chart. The monthly decline in the forex purchase position, moreover, was larger in September than August, casting doubt on the suggestion from the reserves data that intervention slowed last month.