Global output pick-up reduces “excess” liquidity

16th April 2013 by Simon Ward

Global industrial output is conservatively estimated* to have risen by 2.6% in the six months to March, or 5.2% annualised. This would be the fastest six-month growth rate since March 2011 and compares with a small contraction in September 2012 – see chart.

Recent stronger output validates the “monetarist” forecast here that the global economy would regain speed in early 2013, notwithstanding ongoing fiscal tightening, in lagged response to faster real money supply expansion between spring and autumn 2012.

Global six-month real narrow money expansion has slowed since October 2012, with the decline estimated** to have continued in March. This suggests that industrial output growth will moderate in mid 2013 but real money trends remain respectable by historical standards, with a temporary fall in inflation providing support, courtesy of lower commodity prices.

The gap between real money and output expansion is a summary measure of “excess” liquidity available to boost asset prices. The gap remains positive but narrowed further in March, consistent with the liquidity backdrop becoming less favourable at the margin – a development possibly explaining recent choppier markets.

*”Global” = G7 plus emerging E7. The March estimate uses data for the US, China and Russia and an official survey forecast for Japan, with output elsewhere assumed to be unchanged from February.
**The estimate uses data for the US, Japan, Brazil, China and India and assumes unchanged six-month growth elsewhere.

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