Money and credit trends suggest that Chinese economic momentum will remain weak through H1 2020.

The PBoC today released detailed monetary data for October, allowing calculation of the preferred narrow and broad money measures here, i.e. “true” M1 including household demand deposits and M2 excluding bank deposits held by non-bank financial institutions. Six-month growth rates of the two measures eased further – see first chart.

The monetary slowdown suggests that a rise in two-quarter nominal GDP expansion since Q1 2019 will reverse into H1 2020.

The forecasting approach here emphasises narrow money but the Chinese broad money measure used here (not headline M2) has performed equally well as a leading indicator historically, sometimes moving earlier. Growth of this measure has now retraced most of its recovery since H1 2018.

October credit numbers were also disappointing, with six-month growth of total social financing the lowest since April.

Growth of the three measures peaked in May-June, with subsequent weakness probably related to failures of several regional banks and an associated tightening of funding and credit conditions, which appears to have offset monetary policy stimulus, at least temporarily.

Reflecting Chinese weakness, six-month growth of global (i.e. G7 plus E7) real narrow money growth may have slipped back to 2.3% (not annualised) in October from 2.7% in September – second chart. The US, Japan, India and Brazil have also released October money data, accounting – together with China – for 70% of the global aggregate.

The September-October numbers are above the range over December 2017-August 2019 and suggest that nine-month-ahead economic prospects have improved but a move above 3% is needed to confirm a recovery scenario. This is unlikely without a rebound in Chinese money trends.

Last week’s MPC communications and recent data suggest a cut in Bank rate at the next meeting on 19 December.

The MPC’s latest forecast signals an easing bias: inflation is projected to be below the 2% target in two years’ time (at 1.89%), assuming an unchanged 0.75% level of Bank rate. This contrasts with the August forecast, when the two-year-ahead projection was above 2% (2.10%).

The MPC was understandably reluctant to cut rates, or pre-commit to a reduction, at the start of a general election campaign. The two dovish dissents, however, underlined the shift of opinion signalled by the inflation forecast.

The economy may yet be shown to have entered a recession despite this week’s news of a 0.3% rise in GDP in Q3 (below a Bank staff estimate of 0.4%). The Q3 level was only 0.1% (0.07% before rounding) higher than Q1. Initial estimates tend to be revised down when the economy is weakening – recall the downgrade from +0.2% to -0.7% for Q2 2008, the first quarter of the last recession.

Monthly data show that GDP fell in August and September, and the September level was 0.1% lower than March. GDP is currently estimated to have surpassed the March level for a single month in July but this is questioned by data on total hours worked in the economy, which fell by 0.5% between the three-month periods centred on March and July respectively.

The MPC’s forecast implies high recession risk, with an assessed probability of 31% that GDP in Q1 2020 will be lower than in Q1 2019.

Data since the MPC meeting support the case for easing. As well as the GDP undershoot, yesterday’s labour market report showed a cooling of earnings growth along with a further fall in vacancies and rise in redundancies – see first chart.

CPI inflation fell to 1.5% (1.46% before rounding) in October, consistent with the MPC forecast of a 1.42% average in Q4. The decline reflected gas and electricity price cuts, with the core rate – defined here to exclude energy, food, alcohol, tobacco, education and estimated VAT effects – edging up to 1.7%. Core PPI output inflation, by contrast, fell further and usually leads CPI trends – second chart.

Optimists cite October manufacturing PMI results as evidence that global economic momentum is rebounding. Such hopes appear premature.

The global manufacturing PMI new orders index bottomed at 49.0 in June / August, reviving to the 50.0 breakeven level in October. A turnaround had been suggested by a revival in global six-month real narrow money growth in early 2019 – see first chart.

Real money growth, however, stalled between February and August 2019. Allowing for the usual lead, a further recovery in PMI new orders could be delayed until late Q1 2020.

The October rise in the orders index, moreover, was driven by the investment goods component, with consumer and intermediate goods orders little changed – second chart. Business investment, however, usually follows profits, which remain under pressure from weak sales and falling margins. The ratio of US non-farm business prices to unit labour costs, for example, fell in Q3, suggesting a decline in the national accounts measure of domestic non-financial corporate profits – third chart.
 

The US / China economic dispute escalated in August / September, possibly resulting in some front-loading of investment goods orders ahead of scheduled US tariff hikes.

The global services PMI survey, meanwhile, weakened further in October, though is dismissed by the bulls as a lagging indicator. This may be unwise: the services new business index correlates with manufacturing consumer goods orders, with the relationship suggesting a decline in the latter – fourth chart.

The employment indices of the two surveys signal fading income support for consumer spending, with October readings the lowest since 2009-10 – fifth chart. A rise in unemployment would reinforce a recent trend towards credit tightening by bank loan officers (see last week’s Fed survey), impairing transmission of monetary policy stimulus.