Stronger Chinese monetary trends late last year suggested that economic growth would recover during the first half of 2016, contrary to consensus expectations of a further slowdown. Key indicators firmed through the spring but by less than had been expected here. Second-quarter GDP and June activity numbers released today were, on balance, more encouraging, while the monetary signal remains positive.

Annual growth of GDP in volume terms was unchanged at 6.7% last quarter but the more significant news was that nominal GDP expansion rose for a second successive quarter to 7.3%*, the strongest since the fourth quarter of 2014. A rebound had been signalled by a pick-up in money growth from mid-2015. Annual increases in narrow and broad money (as measured by “true” M1 and M2 excluding financial sector deposits) were little changed in June, with recent growth the fastest since 2010 and 2013 respectively – see first chart**.

June activity numbers were mixed. Annual growth of industrial output and retail sales value rose to 6.2% and 10.6% respectively in June, beating consensus expectations. Fixed asset investment, however, slowed further, with an annual value rise of 7.3%, close to a September 2015 low of 6.8% – second chart.

Capex weakness reflects the private sector component, which stagnated in the year to June – third chart. Prospects for private investment, however, are judged here to have improved. Industrial profits lead private capex and are rebounding on the back of stronger nominal GDP growth. A pick-up in growth of deposits of non-financial enterprises over the past year is a further positive signal – fourth chart.



An investment revival coupled with continued solid consumer spending expansion and an export pick-up driven partly by recent exchange rate depreciation may result in stronger volume as well as value growth of GDP during the second half, despite some reduction in fiscal stimulus.

*Corrected from 8.2% originally reported by Thomson Reuters Datastream.
**”True” M1 includes household demand deposits, which are excluded from the official M1 measure. Financial sector deposits are excluded from M2 because they are volatile and less relevant for assessing spending prospects.

The OECD’s G7 composite leading indicator (CLI) strengthened in May, providing further confirmation that the global economy was picking up before the Brexit vote shock. The global impact of the shock is expected here to be minor and offset by a post-vote loosening of financial conditions – the forecast of a rise in growth during the second half, therefore, will be maintained, unless narrow money trends weaken.

The OECD was due to release May leading indicator data on Monday but instead announced that publication would be suspended until September, on the grounds that the Brexit vote was a “significant unexpected event, which is affecting the underlying expectation and outturn indicators used to construct the CLIs”. This is a strange decision: the OECD has never before suspended publication of its entire suite of indicators in response to a shock and it seems a stretch to argue that the Brexit result is more significant than some previous unexpected events (e.g. the 911 terrorist attacks)*.

It is, however, straightforward (if laborious) to replicate the OECD’s calculations to estimate the May data. The first chart shows published and estimated values of the “normalised” version of the G7 leading indicator – rises / falls signal that future GDP growth will be above- / below-trend. This fell steadily during 2015 and early 2016 but stabilised in April and is estimated to have risen slightly in May. The indicator, that is, suggests that growth was on course to move from below- to above-trend during the second half, before the Brexit vote shock.


The second chart shows an alternative version of the indicator designed to predict the level of industrial output rather than the ratio of GDP to trend. The six- and one-month changes in this indicator continued to firm in May, clearly signalling a coming rise in industrial output momentum.


The US component of the G7 indicator has been the main driver of its recent pick-up. The six-month and one-month changes in the US indicator strengthened further in May, confirming an earlier positive signal from faster real narrow money growth – third chart.


The Brexit vote result has the potential to depress the G7 leading indicator via impacts on business / consumer surveys, yield curve slopes and stock prices**. The MSCI All-Country World Index in US dollars, however, has already rebounded to above its level before the 23 June vote, while yield curve flattening has started to reverse. Any survey weakness should be mitigated by expectations of easier monetary policy and may prove temporary.

*The Japanese indicator only was suspended for two months following the March 2011 earthquake / tsunami.
**All G7 country indicators contain at least one business survey component. All except Japan and Germany include consumer sentiment / confidence. The slope of the yield curve is a component of the US, Japanese and German indicators. Stock prices appear in the US, Japanese, UK, French and Canadian indicators.