Money and credit developments are generally studied on a national basis. However, in an integrated world, there is also a case for looking at them on a global scale. National broad money growth rates may – in fact, currently do – diverge, sometimes substantially so.
The global economic recovery over the past few years was first heralded by a revival of both broad money and credit growth, beginning in 2010. The recovery has so far been the strongest in countries where broad money growth has been the highest – notably the United States and the United Kingdom.
Over the past two-and-a-half years, nominal world broad money growth excluding the Chinese contribution has been growing at an average of around 3 percent. This is low by historic standards; although the fact that global inflation is also unusually low means that real broad money growth is relatively stronger.
We show broad money and credit including and excluding China for two reasons. First, because monetary data is best observed from a longer perspective and reliable and relevant Chinese monetary data only goes back so far (broad money admittedly to the late 1980s, but credit only to the early 2000s).
Second, because the size of the Chinese component – the stock of Chinese broad money exceeds that of the US – is such that being unaware of its size would distort the overall impression. So where current broad money trends excluding China are consistent with medium-term growth at best around trend, including China almost doubles the growth rate, and more importantly, is consistent with world output growth slightly above trend.
This highlights the crucial importance of China to world broad money trends – and by extension also to the health of the global economy.
However, some caution may be called for… Chinese broad money growth is currently slowing, meaning that the Chinese incremental impact on world broad money developments is likely to ease.
Moreover, broad money is better as a medium-term indicator than as a short-term one. The broad money numbers should therefore be seen more as a confirmation that the global recovery is on track, than as a sign of imminent above-trend growth. However, the recent pick-up in broad money growth also does imply that there is an upside risk to our forecasts.
The writer is director at Oxford Economics.
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