The latest signal from monetary data is that global economic momentum will inflect weaker from around late 2025. Cyclical considerations suggest that this will mark the beginning of a sustained downswing into 2027.

Lagged money trends argue that underlying inflation will fall further and remain low through 2026. Nevertheless, central banks may be slow to offset economic weakness with additional policy stimulus because of concerns about tariff effects and fiscal indiscipline, as well as scarring from the 2021-22 inflation surge.

The suggestion is that equity markets face rising headwinds, with another sustained bull phase unlikely before 2027, when key cycles are scheduled to bottom. An appropriate strategy may be to underweight markets where monetary trends are relatively weak – Japan and the UK currently – while overweighting sectors with lower earnings sensitivity to expected cyclical weakness.

Elaborating on the above, global six-month real narrow money momentum – a key leading indicator in the approach followed here – reached a local high in March, falling sharply in April / May – see chart 1.

Chart 1

The rise from October 2024 into March suggested that the global economy would regain some momentum from around mid-2025, based on the recent average lag. A June rise in manufacturing PMI new orders could mark the start of such a shift, although results from national (as opposed to S&P Global) surveys were mixed. Still, April / May monetary weakness argues that any near-term recovery will be short-lived, with economic indicators likely to deteriorate again from around late 2025 – chart 2.

Chart 2

The latest fall in real money growth has been broadly based across countries, reinforcing the negative signal. Momentum is notably weak in Japan and the UK, arguing for economic underperformance. Eurozone growth has held up but hasn’t yet crossed above the US, cautioning against “europhoria” – chart 3.

Chart 3

From a cyclical perspective, the stockbuilding cycle is in the window for a peak in terms of both time since the last low (Q1 2023) and the contribution of inventory accumulation to annual G7 GDP growth – chart 4. The latter has been boosted by front-loading to avoid tariffs, which appears to have continued in Q2.

Chart 4

The cycle should turn down by early 2026 at the latest and the baseline assumption here remains for a low in H1 2027, implying that the current cycle will be slightly longer than the 3.5 year historical average, balancing a shorter-than-average prior cycle. Stockbuilding cycle downswings are usually associated with significant slowdowns (or worse) in global economic growth and underperformance of risk assets.

A key question is whether the coming downswing will be accompanied by weakness in the housing and / or business investment cycles, in which case a 2026-27 recession becomes the baseline. A housing downturn is more likely, given the maturity of the current cycle (16 years versus an 18-year average) and downward pressure from elevated longer-term interest rates. The business investment cycle is less advanced (year five versus a nine-year average), with corporate financial balances still healthy and AI deployment providing a tailwind.

Close attention, therefore, should be paid to housing indicators. The six-month rate of change of G7 housing permits / starts recently turned negative, suggesting a darkening outlook – chart 5.

Chart 5

Inflation follows money growth with a roughly two-year lag, according to the simplistic monetary rule, which outperformed every other forecasting approach in 2021-22. Annual broad money growth bottomed in mid-2023 in the G7 and a year later globally, with limited subsequent recoveries. The suggestion is that underlying inflation will fall further and remain low through 2026.

On the analysis here, therefore, central banks could limit economic weakness by delivering timely additional policy stimulus while still meeting, or even undershooting, their inflation objectives. The US Fed, however, may continue to drag its feet amid uncertainty about near-term tariff effects and counterproductive political pressure, with a knock-on effect on the pace of easing elsewhere.

Both global “excess” money flow indicators used here to assess equity market prospects are currently negative, having been mixed three months ago. Specifically, global six-month real narrow money momentum has crossed back below industrial output momentum, while 12-month real money momentum remains beneath its long-run average – chart 6.

Chart 6

The indicators were misleadingly negative in 2023-24 because of a stock overhang resulting from the 2020-21 money growth surge. The assessment here is that there is no longer any excess relative to current levels of nominal GDP and asset prices.

Global manufacturing PMI new orders – a timely coincident indicator of industrial momentum – fell for a third month in May. The decline from a February peak is consistent with a slowdown in global six-month real narrow money momentum between June and October 2024 – see chart 1.

Chart 1

The PMI fall started slightly earlier than had been expected here. The eight-month interval between the June peak in real money momentum and the February PMI peak compares with an average lag of 11 months at prior turning points since 2015.

Monetary considerations alone would suggest that the PMI will decline further into mid-year before recovering to another local high around end-2025 – the dotted arrows in the chart show a possible path.

The US trade policy shock, however, is likely to impart a negative skew to this profile, as recent demand front-loading reverses and spending decisions remain on hold until tariff uncertainty abates.

Accordingly, the current PMI decline could extend further than indicated with only a minor H2 recovery. Weak April money numbers, moreover, suggest darkening prospects for end-2025 – see previous post.

Global (i.e. G7 plus E7) six-month real narrow money momentum – a key leading indicator in the approach followed here – fell sharply in April, to its lowest level since December. The relapse douses hope generated by a pick-up into March, which suggested a bounce-back in the global economy later in 2025, assuming no further negative “shocks”.

The April fall was driven by a slowdown in nominal money growth to its weakest since November. Six-month consumer price momentum eased slightly further to match its 2024 low (2.0% annualised) – see chart 1.

Chart 1

To recap, a fall in real narrow money momentum between June and October 2024 was expected here to be reflected in a global economic slowdown in Q2 / Q3 2025, which the US trade policy shock will amplify.

Subsequent monetary reacceleration into March held out the hope of an economic recovery in late 2025, by which time negative tariff effects could be starting to fade.

The April money growth fall, however, suggests that a negative feedback loop is developing, with reduced confidence due to US policies resulting in increased risk aversion and a tightening of monetary conditions, despite most central banks remaining on an easing path.

The April decline reflected falls across major economies, reinforcing the negative signal – chart 2.

Chart 2

Economic momentum has been supported by demand front-loading but payback is arriving.

A surge in US goods imports boosted GDP in the rest of the world by 0.25-0.5% in Q1 but April advance numbers suggest a full reversal – chart 3.

Chart 3

Inventory accumulation isn’t just a US story. Stockbuilding as a percentage of GDP rose similarly or by more in major European economies in the year to Q1 – chart 4.

Chart 4

Economic growth depends on the change in stockbuilding, so even a stabilisation at its recent pace would suggest a significant loss of output momentum.

Three indicators that signalled the 2021-22 global inflation spike and reversal continue to suggest a favourable outlook.

G7 annual broad money growth led the rise and fall in annual consumer price inflation by about two years, consistent with the rule of thumb suggested by Friedman and Schwarz.

The global manufacturing PMI delivery times index – a measure of supply constraints / shortages – led by about a year.

The annual rate of change of commodity prices – as measured by the energy-heavy S&P GSCI – led by nine months.

Chart 1 overlays the three series, with respective leads applied, on G7 annual inflation.

Chart 1

The latest readings of all three are below their averages over 2015-19. Those averages were associated with average headline and core inflation of below 2% (i.e. allowing for the stated lead times).

Directionally, the suggested influence of the three indicators over their respective forecast horizons is down for commodity prices, sideways for delivery times and up for broad money growth. The latter recovery, however, is from extreme weakness.

In combination, the level and directional signals suggest that inflation will move down into early 2026, with limited recovery over the following year.

Tariffs may affect the profile but are unlikely to change the story. A mechanical boost to US prices in Q2 / Q3 will drop out of the annual inflation rate a year later. The effect may be to push out the inflation low from early 2026 to later in the year.

Tariffs could have a larger and more sustained impact by snarling up supply chains and disrupting production, resulting in delivery delays and shortages.

The global manufacturing PMI delivery times index currently remains below its long-run historical average, as well as its average over 2015-19 – chart 2.

Chart 2

Delivery times have risen in the US but the ISM manufacturing supplier deliveries index is only back to its average.

Reduced exports to the US will increase excess supply in the rest of the world, depressing delivery times and pricing power, balancing upward pressure in the US.

Any tariff boost to inflation will persist over the medium term only if associated with a rise in broad money growth. This could occur if central banks ease policies excessively, because of actual or feared economic weakness, or perhaps to limit upward pressure on currencies. Alternatively, inflation worries could deter non-bank purchases of government debt, resulting in banks being required – voluntarily or otherwise – to fund a larger proportion of (wide) fiscal deficits, creating money in the process.

Such scenarios are plausible but the inflationary effects of any broad money acceleration would be unlikely to appear before 2027.

Global monetary trends suggest demand support for economic activity in late 2025 / early 2026. Such support could offset the negative impact of the US trade policy shock. Growth could bounce back solidly should tariffs be scaled back.

Global (i.e. G7 plus E7) six-month real narrow money momentum is estimated to have risen further in March, reaching its highest level since August 2021, based on monetary data for countries accounting for three-quarters of the aggregate. Nominal money growth appears to have ticked up in March while six-month consumer price momentum slowed – see chart 1.

Chart 1

A fall in global real money momentum between June and October 2024 was expected here to be reflected in an economic slowdown in spring / summer 2025 – chart 2. The US policy shock, therefore, is occurring at an inopportune time, threatening a much more serious downturn.

Chart 2

Real money reacceleration since late 2024, however, suggests a short, sharp hit to economic activity rather than a sustained recession. A recovery in domestic demand could outweigh net export weakness by late 2025, particularly if the tariff regime that eventually emerges is less onerous than currently feared, or at least allows businesses to plan with less uncertainty.

The estimated March rise in global six-month real narrow money momentum was driven by China and India, with the US little changed and Japanese weakness becoming more extreme – chart 3. (Eurozone and UK March numbers will be released next week.)

Chart 3

Could the monetary pick-up reverse? US broad – and possibly narrow – money growth has been supported by an enforced run-down of the Treasury’s cash balance at the Fed, which will be rebuilt if / when agreement on lifting the debt ceiling is reached.

Tariffs will have a temporary impact on CPI numbers, squeezing real money momentum. Still, effects should be small outside the US and offset by recent weakness in energy prices.

The trade shock, meanwhile, is resulting in faster monetary policy easing outside the US, reflecting both economic fears and US dollar weakness.

Prospective influences, therefore, are mixed and a further rise in global real money momentum appears as likely as a relapse.

Recent policy upheavals may eventually prove inflationary but near-term risks are judged here to remain on the downside.

In common with conditions preceding the 2021-22 inflation upsurge, recent developments combine elements of a negative supply shock (tariffs, supply chain disruption, reduced US labour supply) with a potentially major demand boost (ramped-up European defence / infrastructure spending, US tax cuts).

The difference is that the earlier episode involved an immediate surge in money growth as fiscal blowouts were financed by money creation and central banks added fuel to the fire by slashing rates and launching large-scale QE.

Current fiscal developments will plausibly boost money growth as deficit financing needs expand and / or central banks and commercial banking systems are required to provide a greater proportion of funding to limit upward pressure on government borrowing costs. Unlike 2020, this will play out over years rather than months, however. Monetary financing is currently contributing little to G7 broad money growth, though has picked up in China – see chart 1.

Chart 1

Central banks, meanwhile, have turned more cautious rather than stepping on the gas, and policy uncertainty is suppressing business / consumer confidence, which may be reflected in less money growth support from private sector credit demand.

G7 annual broad money growth recovered further in January but, at 4.1%, is still below its 2015-19 average, which was associated with sub-2% headline / core inflation averages – chart 2.

Chart 2

Six-month growth is stronger, at an annualised 5.2%, but hardly ringing inflationary alarm bells.

Has potential economic growth fallen since the 2010s, so that a given level of money expansion is more inflationary than then? Arguments are mixed – possibly weaker labour supply expansion versus AI deployment and higher European investment spending.

The monetarist rule of thumb of a roughly two-year lag between changes in money growth and their maximum impact on inflation conceals significant historical variation but has worked near perfectly in recent years.

With annual money growth bottoming in H1 2023 and only now returning to a “normal” level, the suggestion was that annual inflation rates would fall further in 2025 and remain low through 2026.

Tariff hikes will have a price level impact but second-round effects are unlikely given the restrictive influence of earlier monetary weakness. A (small) lift to annual inflation this year should, therefore, reverse in 2026, raising the possibility that the lag between the H1 2023 money growth low and associated inflation low will extend to around three years on this occasion (still well within the historical range).

The forecast of a local peak in global industrial momentum – proxied by the manufacturing PMI new orders index – around end-Q1 appears to be on track. Monetary trends suggest a modest pull-back over Q2 / Q3 followed by renewed strength in late 2025. US policy actions threaten more pronounced and sustained weakness.

Global manufacturing PMI new orders rose further in February, moving above last year’s May peak to reach the highest level since March 2022 – see chart 1.

Chart 1

The upswing from a low last September, on the view here, reflects a rise in global six-month real narrow money momentum between September 2023 and April 2024 – turning points in money momentum have led the PMI by 10-13 months in recent years.

Real money momentum, however, eased between April and October 2024 before rising to new highs more recently. The suggestion was that the industrial pick-up would pause over spring / summer 2025 but strengthen further into 2026.

The view that the PMI new orders index is at or close to a peak is supported by a February fall in an alternative indicator combining forward-looking components of national business surveys (ISM for the US, NBS for China, Ifo for Germany etc.) – chart 2.

Chart 2

The global earnings revisions ratio also exhibits a contemporaneous correlation with the PMI and declined last month.

The baseline scenario of a modest PMI correction followed by renewed strength has, of course, been called into question by recent US policy actions.

Monetary trends are, for the moment, still giving a reassuring message, with global six-month real narrow money momentum rising slightly further in January – chart 1.

This increase, however, was due to additional strength in China, with US / Eurozone narrow money measures stalling in January, as previously discussed. In contrast to the global (i.e. G7 plus E7) measure, G7 six-month real money momentum has been moving sideways since August – chart 3.

Chart 3

A recent back-up in Chinese money market rates, meanwhile, could presage less upbeat monetary data – chart 4.

Chart 4

A renewed fall in global real narrow money momentum would suggest more lasting / self-reinforcing damage from the US policy shock.