The victory for the Leave campaign in the UK’s referendum on EU membership has dominated financial news since 23rd June. It is of course a major event, not least because numerous forecasts of a mini-recession in the UK are now to be tested. The evidence so far is mixed, with the latest survey from the Confederation of British Industry (published a few days before 23rd June) reporting a rise in the balance of companies planning to expand output in the next three months. Elsewhere the main features are, first, in the developed countries continued growth of broad money at the almost ideal annual rate of 4%, and, second, in China and India signs of a slowdown in broad money growth. The slowdown in both China and India has come about suddenly, and may soon disappear from the data and not prove meaningful. On the other hand, the slowdown could last a few months, perhaps even more. Once a money slowdown/acceleration persists for six months or longer, it starts to matter to the cyclical prospect. My overall assessment is – despite the Brexit shenanigans – the global monetary background remains consistent with steady growth in world demand and output in late 2016 and into 2017. Far too much fuss is being made about Brexit. The UK’s share of world output (when output is measured on a so-called “purchasing power parity” basis) is modest, less than 2½ per cent. The credit downgrades faced by British banks have created possible funding strain for them, recalling the crisis of late 2008. The problem needs to be countered by the provision of long-term refinancing facilities from the Bank of England, just as Draghi handled a similar challenge in the Eurozone in December 2011
Money trends in mid-2016 in the main countries/jurisdictions
What are the latest money growth trends in the main countries? And what is the message for global economic activity over the next year or so, and for inflation/deflation over the medium term thereafter? The table below summarizes the key numbers. For detail, it is recommended that the reader looks at the individual country comments below. Beneath the table I make an overall assessment.
In the last three months the annualised rate of growth of broad money has been between 4.0% and 6.7% in all of the world’s six largest economies. With trend output growth for the world economy usually put at 3½ % a year, this sounds like a recipe for macroeconomic stability. However, money growth ought to be higher than this in the two big developing countries, to reflect their faster trend rate of output growth and the spread of the “banking habit”. (See the country notes below for more detail on the countries themselves.)