Manufacturing PMI results for July support the forecast of a global “double dip” into early 2025.

The global manufacturing PMI new orders index plunged by 1.9 points from June to 48.8, a seven-month low. The combination of a one-month fall of this magnitude or greater and a sub-50 reading occurred in only 14 months since 1998, highlighted by shading in chart 1.

Chart 1

In chronological order, those months were:

• October 1998 (Asian / Russian / LTCM crises)

• December 2000 / January 2001 (start of US / global recession)

• September / October 2001 (911 terrorist attack)

• March 2003 (Iraq invasion)

• September through December 2008 (GFC climax)

• November 2011 (Eurozone crisis / recession)

• February through April 2020 (covid recession)

So the current signal suggests significant economic weakness and risk-off markets, at least until policy-makers respond.

The forecast that global economic momentum would weaken in H2 2024 was based on a fall in six-month real narrow money momentum into a low in September 2023 and an observation that the money-activity lag has recently extended to a year or more – chart 2.

Chart 2

The September 2023 real money momentum low suggests that PMI new orders will reach a low by January 2025. With money trends still weak, however, a recovery may be lacklustre.

Could PMI new orders break below the low of 46.5 reached in December 2022? The low in six-month real narrow momentum in September 2023 was beneath the preceding low in July 2022 – chart 2. Current weakness is more likely to spill over into labour markets, creating negative feedback loops.

“Surprise” economic deterioration is forecast to be accompanied by sharply weaker inflationary pressures, reflecting broad money stagnation in H2 2022 / H1 2023. The consumer goods PMI output price index fell back below its pre-pandemic average in July, following a plunge in the consumer services index the prior month – chart 3.

Chart 3

Will the Bank of Japan’s latest attempt to exit ZIRP prove any more successful than its previous two efforts, in 2000 and 2006?

The monetary backdrop is no more promising. The six-month rate of change of broad money M3 was 0.5% annualised in June compared with 1.3% and -1.1% respectively before the August 2000 and July 2006 rate hikes – see chart 1.

Chart 1

Money growth, admittedly, has been depressed by recent record intervention to support the yen. The judgement here is that the authorities have marked out a major low in the currency – see previous post – so f/x sales are likely to slow / end.

A reduced intervention drag, however, will be offset by a contractionary monetary influence from QT. The announced phased reduction in monthly purchases implies that the BoJ’s JGB holdings will fall by about ¥8 trn during H2 2024, equivalent to an annualised 1.0% of M3.

Credit developments are superficially more supportive of policy tightening. The six-month rate of change of commercial banks’ loans and leases was 3.5% annualised in June compared with -1.9% and 2.8% before the 2000 / 2006 hikes.

Bank lending, however, is usually a lagging indicator of economic momentum, suggesting a slowdown ahead in response to recent activity weakness.

The BoJ “will … continue to raise the policy interest rate” if its outlook for economic activity and prices is realised. Headline and core CPI inflation are projected to be close to the 2% target in fiscal years 2025 and 2026 based on the output gap turning positive and a “virtuous cycle between prices and wages continuing to intensify”.

The “monetarist”  forecast, by contrast, is that inflation is heading for a big undershoot. Six-month core CPI momentum was 1.5% annualised in June*, with lagged broad money growth suggesting a further decline into 2025 – chart 2.

Chart 2

Coming Japanese inflation experience will be another test of forecasting approaches. Simplistic monetarism has trounced new Keynesian orthodoxy so far this decade. Another win for monetarist simpletons will spell third time unlucky for the BoJ.

*Own estimate adjusting for policy effects and seasonals.