• Our global money supply growth indicator accelerated in November
• Advanced economy M1 money supply growth remained elevated…
• …while China and India drove the EM aggregate higher
• Stronger M1 usually ties in with better momentum in growth and equities
• Falling FX reserves and Fed tightening may have an adverse effect going forward, but there are also factors that should be supportive
Financial conditions improving at the end of last year
We have updated our aggregate money supply measures. These are based on the largest advanced and emerging market economies and provide an indication of how financial conditions around the world are developing. The good news is that our global real M1 money supply aggregate has been accelerating. However, the optimistic picture is tempered by the fact that absolute growth rates are not spectacular and our last data point was in November, so the situation might be changing.
M1 money supply growth on the up in November…
Global real M1 money supply growth rose to 7.9% yoy in November from 7.4% in October. The pace of growth is now roughly in line with the historical averages, but is up significantly compared to the summer months when the aggregate reached a low of 4.9%. That reflected sharply slower money supply growth in the emerging market economies, partly offset by stronger money supply growth in the advanced economies. The subsequent acceleration in the global aggregate has been driven by emerging markets, especially India and China, both of which eased monetary policy over that time period. Indeed, Bloomberg’s Asia financial conditions index has also been easing. Still our emerging market real M1 growth indicator remains well below its historical average. In contrast, real M1 growth in the advanced economies is significantly above its trend rate. This is in particular due to double-digit growth in the eurozone series, which could well be a reflection of the ECB’s aggressive asset purchases.
…usually consistent with better momentum for cyclical indicators and risky assets
Major shifts in money supply usually go hand in hand with changes in momentum for cyclical indicators as well as risky asset prices. This can be seen for instance in how the global aggregate has trended with the S&P 500 (see chart below). We have certainly not seen anything in these money supply indicators that would justify the sharp correction in equity markets seen at the start of this year. This seems to reflect concerns about the Chinese economy and financial system, which we think are somewhat overdone, and the sharp fall in oil prices.
Financial conditions going forward
Could the picture of financial conditions have changed since November or more generally going forward? There are some factors that could have a tightening effect. For instance, EM FX reserves have been falling and this could have a contractionary effect on the monetary base. Of course EM central banks could offset this effect by easing monetary policy. However, they may be restricted in what they can do given concerns that currencies might fall too sharply. This is especially the case given the Fed’s monetary policy tightening cycle, which could also lead to slower US money supply growth. On the other hand, the US rate hike cycle will likely be very slow and obviously US rates are still very low. In addition, the ECB and the BoJ will continue – and likely even step up – monetary easing. So overall we would expect global financial conditions to remain supportive of moderate economic growth.