Global money growth has picked up since late 2024 but remains subdued, while the stock of money is no longer in excess relative to nominal economic activity and asset prices. The monetary backdrop, therefore, appears insufficiently supportive to offset economic / market damage from US-led tariff hikes.

Prospective tariff effects, meanwhile, require a revision to the previous forecast here of a downside global inflation surprise in 2025 related to extreme monetary weakness in 2023. A price level boost this year is unlikely to yield second-round effects given disinflationary monetary conditions, so a near-term lift to annual inflation should reverse in 2026. The effect may be to extend the lag between the money growth low of 2023 and the associated inflation low from two to three years.

The elimination of a surplus stock of money has been mirrored by erosion of excess labour demand, with job openings / vacancy rates mostly now around or below pre-pandemic levels. Economic weakness, therefore, may be reflected in a rise in unemployment that eventually dominates central bank concerns about inflationary tariff effects, suggesting that current policy caution will give way to renewed easing later in 2025.

Global six-month real narrow money momentum – the key monetary leading indicator followed here – fell between June and October 2024 but has since rebounded, reaching a post-pandemic high in February. (The timing of the mid-2024 dip has changed slightly from previous posts, mainly reflecting annual revisions to seasonal adjustment factors for US monetary data.) Real money momentum, however, remains below its long-run average – see chart 1.

Chart 1

The lead time between real money momentum and manufacturing PMI new orders has averaged 10 months at the four most recent turning points. Based on this average, the 2024 real money slowdown and subsequent reacceleration suggest a PMI relapse in Q2 / Q3 followed by renewed strength in late 2025 – chart 2.

Chart 2

Tariff effects – including payback for a front-loading of trade flows – are likely to magnify mid-year economic weakness and could push out or even abort a subsequent recovery: delayed central bank easing, a confidence hit to business / consumer credit demand and a near-term inflation lift could reverse the recent pick-up in real money momentum.

Previous posts, meanwhile, argued that stocks of (broad) money in the US, Japan and Eurozone are no longer higher than warranted by prevailing levels of nominal economic activity and asset prices, implying an absence of a monetary “cushion” against negative shocks. Excess money appears to be substantial in China but could remain frozen as US trade aggression and domestic policy caution sustain weak business / consumer confidence.

Chart 3 shows six-month real narrow money momentum in major economies. Chinese strength is a stand-out but may partly reflect payback for earlier weakness – momentum needs to remain solid to warrant continued (relative) optimism. A Eurozone recovery still leaves momentum lagging the US (where revised numbers show less of a recent slowdown), with the UK further behind. Japanese weakness is alarming, suggesting significant downside economic / inflation risk and consistent with recent lacklustre equity market performance.

Chart 3

European economic optimism has been boosted by a relaxation of German fiscal rules and a wider drive to increase defence spending. This is significant for medium-term prospects but has limited relevance for the near-term economic outlook, which hinges on whether an uplift from monetary easing will prove sufficient to offset trade war damage.

The two flow indicators of global “excess” money followed here are giving a mixed message: six-month growth of real narrow money has crossed above that of industrial output (positive) but 12-month growth remains below a long-term moving average (negative). This combination was associated with global equities slightly underperforming US dollar cash on average historically.

From a cyclical perspective, a key issue is whether the US tariff war shock brings forward peaks and downswings in the stockbuilding and business investment cycles, which are scheduled to reach lows in 2026-27 and 2027 or later respectively. The previous baseline here was that upswings in the two cycles would extend into 2026, a scenario supported by the current monetary signal of a rebound in economic momentum in late 2025.

The next downswings in the two cycles are likely to coincide with a move of the 18-year housing cycle into another low. Triple downswings are usually associated with severe recessions and financial crises. Such a prospect is probably still two years or more away but the US policy shock may have closed off the possibility of a final boom leg to current upswings before a subsequent crash.

Table 1 updates a comparison of movements in various financial assets so far in the current stockbuilding upswing (which started in Q1 2023) with averages at the same stage of the previous eight cycles, along with changes over the remainder of those cycles. Three months ago, US equities, cyclical sectors, the US dollar and precious metals were performing much more strongly than average, suggesting downside risk. By contrast, EAFE / EM equities, small caps and industrial commodities appeared to have catch-up potential.

Table 1

Q1 moves corrected some of these anomalies, with the US market falling back, Chinese / European equities performing strongly, US cyclical sectors lagging, the dollar falling and industrial commodity prices recovering. Precious metals, however, became even more extended relative to history, while small cap performance has yet to pick up.

The updated table suggests potential for further strength in EM and to a lesser extent EAFE equities, along with industrial commodities. Cyclical sector underperformance and dollar weakness could extend, while gold / silver appear at high risk of a correction. The larger message, however, is that, even assuming a delayed peak, the stockbuilding cycle has entered the mid to late stage that has been unfavourable for risk assets historically.

The suggestion of EM outperformance is supported by monetary considerations. Six-month real money momentum is stronger in the E7 large emerging economies than in the G7, while – as noted earlier – global real money is outpacing industrial output. EM equities beat DM on average historically when these two conditions were met, underperforming in other regimes – chart 4.

Chart 4

Recent outperformance of non-US equity markets may be a signal of the end of the bull market rather than a harbinger of broadening strength.

Previous analysis comparing returns in the current stockbuilding cycle with history suggested weaker prospects for risk assets, a reversal of US equity market / cyclical sector outperformance, a decline in the US dollar, stronger industrial commodity prices and a correction in precious metals. Several of these themes are playing out and appear to have potential to extend.

The stockbuilding cycle averages 3.5 years in length and last bottomed in Q1 2023, suggesting another low in H2 2026. The previous view here was that the current cycle would be longer than normal, to balance a shorter previous cycle (2.75 years) and to harmonise with the business investment cycle, which isn’t scheduled to bottom before 2027.

There is, however, anecdotal evidence of firms / importers stockpiling inputs / finished goods to avoid tariffs, raising the possibility of an earlier cycle peak and start to the downswing.

The cycle indicators followed here do not currently support this alternative scenario. The annual change in G7 stockbuilding, expressed as a percentage of GDP, is usually significantly positive at cycle peaks but stalled just above zero in Q4. A more timely indicator based on business surveys was little changed through February – see chart 1.

Chart 1

The previous view – that a cycle peak is still several quarters away and a downswing will be delayed until 2026 – will, therefore, be maintained. This assessment is consistent with a recent rise in global six-month real narrow money growth, suggesting a recovery in economic momentum in late 2025 following Q2 / Q3 weakness – see previous post.

Risk assets typically rally strongly in the first half of a stockbuilding cycle, partially retracing gains in the run-up to the next trough. Table 1, reproduced from the earlier post, compares movements in the current cycle through end-2024 with averages at the same stage of the previous eight cycles, along with changes over the remainder of those cycles.

Table 1

US equities, cyclical sectors, the US dollar and precious metals had outperformed relative to history, suggesting a stronger likelihood that they would lose ground between end-2024 and the next trough. Areas that had lagged and appeared to have catch-up potential included EAFE / EM equities, small caps and industrial commodities.

Table 2 updates the comparison through 11 March. The US market correction and rallies in Europe / China have narrowed the US / EAFE and US / EM performance gaps but they remain wide relative to history. Other moves in the “right” direction with apparent potential to extend include weakness in cyclical sectors, a decline in the US dollar and a rise in industrial commodity prices.

Table 2

By contrast, there has been no correction of the “anomaly” of small cap underperformance, while unusual strength in precious metals has extended further.

The larger message is that, even assuming a delayed peak, the stockbuilding cycle has entered the mid to late stage that has been unfavourable for risk assets historically.

Monetary trends suggest that the global economy will remain soft in H1 2025, while inflation rates will fall further, undershooting targets. Cycle analysis holds out a prospect of economic reacceleration later in the year but risk assets might have limited further upside even in this scenario, although international / EM equities might regain relative performance.

Global six-month real narrow money momentum recovered from a low in September 2023 into Q2 2024 but has since moved sideways at a weak level by historical standards – see chart 1. Based on a normal six to 12 month lead, this suggests below-trend economic growth through Q2 2025, at least.

Chart 1

Economies exhibiting monetary weakness are at greater risk from negative policy or other shocks. As an example, a fizzling-out of a recovery in UK six-month real narrow money momentum in H1 2024 signalled an approaching growth stall but the Budget tax shock appears to have tipped the economy into contraction.

With job openings / vacancy rates back in pre-pandemic ranges, below-trend global growth is likely to be associated with greater deterioration in labour markets than in 2024. In economics parlance, a movement down the Beveridge curve may be approaching a gradient shift such that a further fall in vacancies will be associated with a significant unemployment rise.

A further issue for monetary economists is the “false” US recession signal of 2022-23. Most annual contractions in US real narrow money historically were associated with recessions, and all on the scale of the 2023 decline – see chart 2. On three occasions (highlighted), however, the interval between the start of the contraction and the onset of recession was unusually long, i.e. up to 32 months.

Chart 2

On inflation, the monetarist rule of thumb that price momentum follows the direction of broad money growth roughly two years earlier suggests a further slowdown into undershoot territory in H1 2025. Chart 3 shows the relationship for the Eurozone but the message of headline / core deceleration is the same for the US, Japan and the UK.

Chart 3

Global PMI output price indices in manufacturing and services are close to 2015-19 averages, when headline / core inflation averages were below target.

Financial market prospects, on the “monetarist” view, depend on whether there is “excess” or “deficient” money relative to the economy’s needs. Two flow measures of global excess money were used here historically – the gap between six-month rates of change of real narrow money and industrial output, and the deviation of the annual change in real money from a slow moving average. A “safety first” approach of holding global equities only when both measures were positive would have outperformed buy-and-hold significantly over the long run.

The flow measures, however, remained mixed / negative in 2023-24, understating the availability of money to boost markets because they failed to capture a stock overhang from the 2020-21 monetary surge. To assess whether this stock influence remains positive, the approach here has been to use a modified version of the quantity theory in which the money stock is compared with an average of nominal GDP and gross wealth.

Chart 4 shows that an average of US nominal GDP and gross wealth remained below the level implied by the money stock through mid-2024, consistent with a positive stock influence on asset prices / the economy. Equivalent analysis for Japan and the Eurozone shows the same. In all three cases, however, the nominal GDP / wealth average moved ahead of the money stock during H2 2024, implying that stock and flow indicators are now aligned in suggesting a neutral / negative backdrop.

Chart 4

While monetary indicators suggest near-term softness, cycle analysis holds out a prospect of stronger economic performance later in 2025 and in 2026. A key consideration is that the stockbuilding and business investment cycles appear some way from reaching peaks, with the next lows unlikely before H2 2026 and 2027 respectively.

The last trough in the stockbuilding cycle is judged to have occurred in Q1 2023, with national accounts inventories data and business surveys suggesting that the upswing is around its mid-point – chart 5. The previous cycle was shorter than the 3.5 year average, so the current one could be longer, with a low as late as H1 2027. An associated downswing might not start until H1 2026.

Chart 5

The 7-11 year business investment cycle appears to have bottomed in 2020, although a case could be made that this was a false low due to the pandemic, with the last genuine trough reached following a mild downswing in 2015-16. On the more plausible former view, the next low is scheduled for 2027 or later, implying potential for a 2026 boom.

The longer-term housing cycle, which bottomed in 2009 and has averaged 18 years, is in the time window for a peak but significant weakness could be delayed until H2 2026 or later.

Monetary and cycle signals could be reconciled if near-term economic weakness / favourable inflation news triggers faster monetary policy easing and a strong pick-up in money growth into mid-year.

Would such a scenario be associated with further significant gains in risk assets? The history of the stockbuilding cycle suggests not.

Risk assets typically rally strongly in the first half of a stockbuilding cycle, partially retracing gains in the run-up to the next trough. Table 1 compares movements so far in the current cycle with averages at the same stage of the previous eight cycles, along with changes over the remainder of those cycles. US equities, cyclical sectors and precious metals have outperformed relative to history, suggesting a stronger likelihood that they will lose ground between now and the next trough.

Table 1

Areas that have lagged relative to history include EAFE / EM equities, small caps and industrial commodities, hinting at catch-up potential in the event of a delayed stockbuilding cycle peak and late (H1 2027) trough. This prospect would be enhanced by a reversal of unusual US dollar strength so far in the current cycle.

Still, any such catch-up might be a relative rather than absolute move against a backdrop of a maturing cycle upswing, a possible US market correction and neutral / negative excess money conditions.