Graphic Content – June; Global real M1 suggests material risk of recession in 2019
13th June 2018
Global real M1 money supply growth is currently the lowest since the global financial crisis, which does not bode well for global economic activity.
The relationship between real M1 – narrow money adjusted for inflation – and economic activity makes sense; nominal M1 is a measure of notes and coins owned by the general public, plus the private sector’s cash held in current accounts, and real M1 adjusts for inflation to give real purchasing power. If the private sector has a lower real cash balance, it is likely to spend less. And on the other side of the equation, banks with lower deposits are likely to lend less. Banks lending less is not good for growth, since changes in credit growth (or the ‘credit impulse’) are highly correlated to GDP growth, and are often correlated to asset prices.
Source: Absolute Strategy, Bloomberg, 31/03/1999-31/05/2018. Past performance is not a reliable indicator of future results.
The chart above plots the 6-month growth in global real money supply (taking a 3 month average) against the 6 month change in global manufacturing PMI. Money supply growth leads by 3 months, although as the money supply figure uses a 3 month average, this indicates that the lag is longer than 3 months. (Indeed, the ECB has previously found that real M1 growth leads Eurozone real GDP by around 1 year).
In terms of what’s driving real money supply growth lower by geography, China’s M1 nominal money supply growth has slumped to 6.0%, back to levels seen pre the big 2015 stimulus. China CPI has been little changed, so this is indicative of the real trend too.
Eurozone M1 YoY has dipped sharply from the highs of 12.9% in 2015 to 6.9% now, but headline inflation is also picking up on commodity base effects, meaning that real M1 is moving lower and back to 2013-2014 levels.
But perhaps most surprising has been the move in the US, the region whose economy has been outperforming expectations by the most this year. Since the end of 2016, the growth of US M1 YoY has almost halved, and due to the pickup in US inflation lately, real M1 is lower and close to the growth rate seen in February 2016, and before that 2010.
The UK has been following the global trend – the Bank of England’s preferred measured of M4 (broad money) is now in negative territory on a 3-month annualised basis for the first time since end 2011. The Bank of England doesn’t publish an official measure of M1, but narrow money growth is also negative.
A key takeaway from the chart above is that falling real money supply growth is symptomatic of overly tight global monetary conditions, when conventional wisdom at the moment is that monetary policy is still overly accommodative.