Beijing signals a new approach to policy – how far will policymakers go to boost growth?

Monetary prospects and cycle considerations suggest global economic strength in H2 2025 / 2026 but a “hard landing” – or at least a scare of one – may be necessary first. Commentary here at mid-year proposed the following baseline scenario: A “double dip” in global industrial momentum in H2 2024 with limited recovery in early 2025, reflecting the profile of real narrow money momentum with a roughly one-year lag.

Monetary trends suggest that UK economic performance will converge down to a weak Eurozone. A post in June argued that Eurozone monetary trends were too weak to support a sustained recovery. The composite PMI output index peaked in May and fell below 50 in September (flash reading of 48.9), confirming an ongoing “double dip”.

A pick-up in US narrow money momentum is a hopeful signal for 2025 but requires confirmation and does not preclude near-term economic deterioration. The measure of narrow money tracked here (M1A, comprising currency in circulation and demand deposits) rose by 0.8% in August, pushing six-month annualised growth up to 10.5%. The broad M2+ measure (which adds large time deposits at commercial banks and institutional money funds to the official M2 aggregate) also rose solidly in August, by 0.5%, but six-month growth remains subdued and within the recent range, at 3.5% annualised.

Chinese money / credit trends remain weak but could be at a turning point. Six-month rates of change of broad money and total social financing have stabilised above June lows. (Broad money here refers to M2 excluding money holdings of financial institutions, which are volatile and less informative about economic prospects.)

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Monetary considerations argue that the ECB’s latest inflation forecast, like earlier projections, will be undershot. Annual growth of broad money – as measured by non-financial M3 – returned to its pre-pandemic (i.e. 2015-19) average of 4.8% in October 2022. Allowing for a typical two-year lead, this suggested that annual CPI inflation would return to about 2% in late 2024.

The “double dip” downturn in global manufacturing continued last month. Global manufacturing PMI new orders fell steeply from a peak in May 2021 to a trough in December 2022 (first dip), with a subsequent recovery ending in May 2024. The second dip was confirmed by a sharp fall to below 50 in July, with the index unchanged in August.

Global six-month real narrow money momentum is estimated to have moved sideways for a fourth month in July at a weak level by historical standards. The baseline scenario here remains that global economic momentum – proxied by the global manufacturing PMI new orders index – will move down into late 2024, echoing a fall in real money momentum into September last year. Based on more recent monetary data, a subsequent recovery may prove limited, with weakness persisting well into H1 2025.

The assessment here remains that the global economy has entered a “double dip” currently focused on manufacturing but likely to extend to services / labour markets, reigniting worries about a hard landing. Economic weakness is expected to be accompanied by an inflation undershoot into H1 2025. DM flash manufacturing PMI results for August were mixed across countries but on balance weak, suggesting a further small reduction in global manufacturing PMI new orders following a July plunge to below 50 (assuming no change for China and other non-flash countries).

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The most important issue in the global economic outlook is the meaning of Chinese monetary weakness. Six-month rates of change of narrow / broad money, bank lending and total social financing (on both new and old definitions*) reached record lows in June / July.

A sharp fall in the global manufacturing PMI new orders index in July confirms renewed industrial weakness. The companion services survey, however, reported an uptick in the new business component, which is close to its post-GFC average.

A post in June suggested that a recovery in the OECD’s US composite leading indicator was ending. A calculation based on the latest input data confirms a reversal lower. The historical performance of the OECD indicator compares favourably with the Conference Board leading index

Manufacturing PMI results for July support the forecast of a global “double dip” into early 2025.

The global manufacturing PMI new orders index plunged by 1.9 points from June to 48.8, a seven-month low.