Graphic Content – December; Real M1 don’t lie

Mike Riddell
Written by

19th December 2018

Never mind chart of the month, more like chart of the year. Back in June we flagged that global money supply growth, adjusted for inflation, had had a long and very decent track record of leading global economic activity by 3+ months. As we explained half a year ago, global real M1 was slumping, indicating a sharp deterioration in the global economy through the remainder of 2018, which led us to suggest that there was a material risk of a global recession in 2019.

Since then, we have already seen negative quarterly GDP prints for Q3 in Germany, Sweden, Switzerland, Italy and Japan.

Updating the chart below suggests that this list is likely to grow. Global real M1 has deteriorated further, meaning that global economic data should continue to roll over into Q1 of next year.

Global growth set to deteriorate further
Global growth set to deteriorate further
Source: Absolute Strategy Research and Bloomberg, Dec 2018.

Even worse news is that the data in the chart above is only up to the end of October, and since then we have already seen nominal M1 in a number of large countries continuing the downward trend. The most notable negative surprise was in China, which recorded the second lowest ever nominal M1 YoY at 1.5% in November, down from 2.7% in October. The US also saw M1 fall from 4.1% in October to 3.0% in November, ominously the lowest since August 2008, while Japan edged slightly lower.

But, so as to avoid ending the year on too depressing a note, the big bright spot is that the ‘real’ bit of real M1 should start to improve. That’s because the price of oil has fallen 40% since the end of September, and as we’ve mentioned before on this blog, global commodity price weakness appears to cause stronger global economic activity around 5 months later. To say that things will get worse before they get better is a horrible cliché, but providing nominal M1 doesn’t collapse (a pause in Fed rate hikes should help), our favourite lead indicator should start to send us more encouraging signals for Q2 2019 onwards.

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