March and April have seen a marked 70% rebound in the oil price from the January lows of about $26 a barrel. The move owes much to the dynamics of the energy market itself, but it is being interpreted by financial markets as a sign that global demand should be sufficient to deliver at least trend growth (say, 3% – 3½%) in world output in 2016. The mood has changed sharply from January’s alarmist hysteria, much of it due to so-called “analyses” from the Bank for International Settlements, the International Monetary Fund and leading investment banks. (These organizations ought to have known better, bluntly.)
The line taken in International Monetary Research Ltd. notes has been that recession in 2016 is extremely unlikely. Only hopelessly incompetent monetary policy decisions could cause a recession to start from a situation in which upward pressures on inflation have been and remains weak, and the price level has been and remains more or less stable. I don’t have much respect for the top brass in the major relevant institutions (i.e., the Fed, the ECB, etc.). But, to initiate a recession, they would have had to be yet crasser than they were in the last period of idiocy, in late 2008. In practice, the absence of upward pressures on the price level has allowed significant monetary-policy easing in China and the Eurozone. It seems that in China M2 growth has run about 1% – 1½% a month (i.e., at annualised rates of 13% – 20%) in early 2016. In the four major developed “countries” (i.e., taking the Eurozone as a country) – the USA, the Eurozone, Japan and the UK – the annual rates of broad money growth are currently 3.9%, 5.0%, 2.6% and 4.5%, and the three-month annualised growth rates are 5.1%, 4.4%, 2.8% and 5.0%. If asked for an ideal rate of money growth, Milton Friedman would typically reply – at least for the USA – “5% a year”. The Bank of Japan seems unable to see the light in the “broad money vs. monetary base” debate. But in truth money growth trends in the main countries are not far from perfection at present.
Money trends in spring 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, and later make some comments on recent banking and monetary developments in the Eurozone.
My main comment here is much as in February and March. As I said there, financial markets were spooked in the opening weeks of 2016 by talk of an imminent and/or probable recession. But two points had to be emphasised,
- no one in central bank or regulatory officialdom, or in top political positions, in the main countries wanted a recession in 2016 or even, frankly, a slowdown in growth from the rather meagre levels of the previous four/five years, and,
- with inflation at close to zero, and a widespread view that the latest bout of weak commodity prices signalled outright deflation, policy-makers had ample scope to pursue expansionary monetary policies.
There were also numerous media reports that central banks had “run out of ammo”. This was rubbish then, is rubbish now and will always be rubbish. The creation of money by the state is child’s play. Whenever it wishes, the government, or an agency of the state such as the central bank or a public sector institution, can borrow from the banking system, and use the loan proceeds to purchase something – anything – from the non-bank private sector. It should be obvious that, by these means, the state expands the quantity of bank deposits held by non-bank private-sector agents, i.e., the quantity of money, broadly-defined. In other words, policy-makers have the ability to raise nominal national income by any extent they wish, if they adopt sufficiently expansionary monetary policies.
The opening weeks and months of 2016 saw the relevant processes at work in both China and the Eurozone. In China monetary policy-makers relaxed credit allocations, so that the (mostly state- owned) banks added sums to both side of their balance sheets, and created new deposits (i.e., money) on a large scale. I cannot work my way round the People’s Bank of China website in Chinese characters and it may well be the case that the PBOC has already published February’s M2 data. But I have found an English-language source for January’s M2 figure, which was a 1.7% jump. If that carried on for a year, M2 would increase by 22.4%, and the Chines housing market, stock exchange and economy would be booming. Newspaper reports suggest that something similar continued into February. Yes, this cannot be allowed to persist for more than two/three months, perhaps six months at the outside, but the fears of global deflation because of a Chinese slowdown have been thoroughly refuted.
In the Eurozone the European Central Bank has persevered with its “quantitative easing” programme. The annual rate of M3 growth is about 5%, and for most three-month periods the increase lies in the 1% – 1½% band (i.e., annualizing at about 5%). For an economy with an output trend growth rate of perhaps 1½%, an “inflation” objective” of 2% or less, and a tendency in recent years for the ratio of broad money to GDP to rise a bit, 5% is more or less perfection. The ECB and Mario Draghi need do no more, and there is absolutely no need for negative interest rates. (Negative interest rates ought to cause banks to lend out excess cash to other banks, revitalizing the inter-bank market. But there are so many silly rules and regulations at present that this natural market response is not emerging. Instead negative rates on banks’ cash reserves are another adverse influence on bank profits, which is causing managements and shareholders to squeal. QE works, if you don’t mind. Can publicity-seeking central bankers and the commentariat move on, please?)
My view remains that 2016 ought to see roughly trend growth in world output, despite the delinquent behaviour of characters like Vladimir Putin in Russia and Nicolas Maduro in Venezuela, and the Petrobras foul-up in Brazil. With 3% – 3½% growth of world output, car registrations in many developing countries are climbing on a 5%-10%-a-year trend and the world’s total car fleet by 3% – 4% a year. Automobile transport is less than half of all oil consumption, but (along with ever-rising numbers of planes, ships and so on) it is easy to see here why global oil demand is on a long-term upward trend of perhaps 1½m. barrels per day each year. In my last 2015 video presentation I said that – without new discovery and investment – non-OPEC oil production falls by about 3m. b/d per year, a number which is pretty much an industry consensus. Non-OPEC oil production is now thought likely to fall in 2016 – from Q4 2015 to Q4 2016 – by at least 700,000 b/d. Because of the dearth of oil industry investment in 2015 and 2016, the fall in non-OPEC production in 2017 will be larger than in 2016. So the excess supply that has characterised the oil market since late 2014 will be replaced by a supply shortfall and excess demand in 2017, unless OPEC production rises sharply. OPEC production (notably from Iraq and Saudi Arabia) has indeed risen sharply in 2014, 2015 and to some extent in 2016, and further increases are to be envisaged from Iran and Libya (if the civil war can be stopped) in 2017. All the same, the oil market is returning to equilibrium at much higher prices than those prevailing in January 2016. I stick to my forecast in my video presentation then that by end-2017 the oil price would be at least 50% higher and perhaps double the $35-a-barrel figure seen in the final weeks of 2015.
This will push up producer and consumer price indices in late 2016 and early 2017 across the world, possibly resulting in talk about “the return of inflation”. Against that, non-oil commodity prices are generally still weak and wage gains in the advanced industrial economies are very modest. Money growth everywhere is still too low to worry about a significant medium-term inflation flare-up.