Real and Nominal Global Money Growth Slows Except in EMU Where Nominal Money Growth Remains Strong

Nominal money growth is slowing in global money center areas except for the EMU. U.S. nominal money growth has decelerated to a three-month 0.5% annual rate from 4.1% over one year and 8.8% over two years- a sharp pull back. In the U.K., money growth has decelerated to a three-month pace of 3.6% from 4.7% over 12 months and 5.4% over two years. In Japan, money growth that has been better-controlled; it pitches a 3.9% pace over three months compared to 3.4% over 12 months and 4% over two years- more or less steady growth.

By comparison in the EMU, three-month nominal money growth has accelerated to an 8.7% pace from 6.6% over 12 months and 7.2% over two years. These are clear accelerations to the strongest three-month money growth in this grouping- adding that distinction to the strongest six-month pace and the strongest 12-month pace.

The ECB has been a late comer to the monetary tightening parade. Of course, this is a parade Japan has yet to join – but for good reason, its inflation remains moderate. Europe faces unique and significant challenges to its outlook with the energy pipeline from Russia having been damped and then shut- as Russia complains that economic sanctions prevent the shipment of needed equipment to keep the pipeline running.

Credit in the EMU mirrors money growth rates. Private credit is up by 6.6% over 12 months, up at a 7.0% pace over six months and up at a 7.5% annual rate over three months.

Real flows Real money supply has slowed everywhere although less definitively in Japan. EMU money growth is at a 1.1% pace over two years, it then contracts at a 2.3% pace over 12 months, at a 3.7% pace of contraction over six months. Over three months EMU money growth has ticked up to a 0.2% annual rate. Real private credit growth in the EMU shows a drop at 1.4% pace over two years, a drop at a 2.3% pace over 12 months, a drop at a 2.9% pace over six months, and then a lesser pace of decline of 1.0% over three months.

Inflation and growth trends Real money growth in the U.S., the U.K. and Japan show clear decelerations from two-year to one-year with the U.S. and the U.K. both logging money growth declines over 12 months at -3.8% in the U.S. and -3.9% in the U.K. Over six months, the U.S., the U.K., and Japan all log declines in money growth as well as growth decelerations. Over three months growth rates for real balances decline at a lesser pace than over six months in all three countries, but in the U.S. and the U.K. the three-month pace of decline is still a more substantial decline than the pace over 12 months. In Japan, the three-month growth in money is only 0.7%, but that is the strongest on these horizons since the two-year pace of 2.8%.

Rising interest rates in the U.S., their the knock-on effects on bond yields, pressures other central banks, and impact on currency values, have been ongoing stories in international finance and economics. Japan’s inflation rate is only at 3% compared to inflation at over 8% on CPI gauges in the U.S., U.K. and EMU.

Growth conditions Industrial production trends (Y/Y) are up to date through July for all four jurisdictions in the table. Japan and the EMU show IP declines; the U.S. and the U.K. show increases in industrial output. In the U.K., output is skimming by with a low pace of expansion at 1.1% and with most recent growth rates in the 1% to 2% annual growth range. In the U.S., IP data for August are available; U.S. IP rises by 3.7% year-over-year, but U.S. IP has been gradually slowing.

Composite PMIs are lower year-on-year. The U.S. composite PMI has dropped by 5.5% point over the last 12 months, in the EMU the composite PMI has dropped by 10.3 points, in the U.K. it has dropped by 5.2 points while in Japan it is still recovering with its composite PMI having risen by 3.9 points. The U.S. shows six-monthly year-on-year declines in a row in its composite PMI; the U.K. shows five in a row; the EMU shows four in a row; Japan logs a string of six-monthly increases in a row in its composite PMI.

Clearly inflation is causing all these shifts. Growth is slowing, money growth is slowing in real terms and yet inflation has turned very little. Japan is the low inflation and therefore contrarian country. Because it has kept its money supply better in line, it has been able to hold the line on interest rates as well; but that has caused the yen to drop sharply against the dollar. A recent fiscal plan by the new U.K. Prime Minister has swamped the efforts of the BOE to fight inflation and harness expectations and led to a dramatic fall in the value of the pound sterling.

Domestic inflation and monetary policy moves have clear international consequences, and the world economy is feeling the aftershocks of inflation having been allowed to run loose. Even so, we hear many political voices pushing back at central banks pleading for them to back off on rate hikes apparently still preferring to risk continued excess inflation to a path that would more clearly rein it in – and risk a short-term growth set-back. This is a reminder why central banks need to be independent- even then there is no guarantee of inflation control. The Covid pandemic encouraged central banks to join the governmental fiscal stimulus and that has proved to be a mistake. Cushioning one sort of pain will now lead to the imposition of another sort of pain.