China an outlier as global real money weakness intensifies

Global six-month real narrow money momentum – a key monetary leading indicator of the economy – is estimated to have moved deeper into negative territory in May, suggesting that a likely recession over the remainder of 2022 will extend into early 2023 – see chart 1.

The May estimate is based on monetary data for countries accounting for a combined 65% weight in the G7 plus E7 aggregate tracked here, along with 93% CPI coverage. Missing numbers are assumed to have maintained stable rates of change.

Real money momentum of an estimated -1.2% (not annualised) compares with lows of 0.4% and -0.5% associated with the 2001 and 2008-09 recessions respectively.

Chart 2 shows a longer-term history using G7-only data. The current rate of contraction of G7 real narrow money was reached only twice over the last 50+ years – in 1973 and 1979 before severe recessions. The rate of contraction of real broad money is faster than during those episodes.

Global real narrow money weakness intensified in May despite stable growth in China, mainly because of faster US contraction – chart 3. China’s positive monetary divergence may explain recent better equity market performance, with the MSCI China index now outperforming global indices year-to-date – chart 4.

The fall in global six-month real money momentum in May was driven by a further slowdown in nominal money growth, with six-month CPI inflation stabilising after a January-April surge – chart 5.

CPI momentum will almost certainly fall back in H2 – the relationship in chart 6 suggests that commodity prices would have to rise by a further 50% by December to prevent a decline.

A CPI slowdown, however, could be offset by further loss of nominal money momentum – unless rising growth in China (22% weight in the G7 plus E7 aggregate) offsets likely weakness in the US / Europe.