The global narrow money slowdown appears to have extended in February, suggesting that 1) economic prospects for later in 2018 continue to deteriorate and 2) the liquidity backdrop for equities and other risk assets remains unfavourable.
The US, China, Japan and India have released monetary data for all or part of February. Based on this information and available inflation data, six-month growth of real narrow money in the G7 plus E7 economies is estimated to have fallen to about 0.75% (not annualised) – a significant further drop from 1.3% in January*. It last moved below 1% from above in November 2007, in the early stages of the financial crisis and ahead of the 2008-09 recession – see first chart.
That recession, and all previous global economic downturns since the 1960s (at least), were preceded by a contraction of real narrow money. The expectation here is that the six-month growth rate will stabilise or recover slightly over coming months, reflecting a moderation in six-month consumer price inflation and a partial reversal of recent US weakness. Even if this proves correct, the monetary slowdown since mid-2017 promises a significant downshift in economic growth over the remainder of 2018.
The further fall in global real narrow money growth in February was driven by the US, where the six-month change appears to have turned negative. Chinese growth is estimated to have been little changed in February after a large fall in January**, while Japanese growth weakened slightly further – second chart.
*The four countries mentioned account for 62% of the G7 plus E7 aggregate. The estimate assumes unchanged money growth and / or inflation in countries for which February data are not yet available.
**China has released data for M1 / M2 but not household demand deposits, which are included in the narrow money measure tracked here. The estimate assumes a 7% month-on-month rise in such deposits, based on experience in previous years with a late New Year holiday.