The recent recession and current revival in world industrial output bear a close resemblance to the deep 1974-75 contraction and subsequent recovery. This comparison suggests an ongoing economic upswing during 2010 but with growth momentum slowing as the year progresses.

A weighted average of industrial output in the Group of Seven (G7) major economies and seven large emerging economies (the “E7”) fell by 14% between February 2008 and February 2009 but had recovered by 7% by September – see earlier post for more details. The decline is similar to a 12% drop in G7 industrial output between May 1974 and May 1975 – the previous biggest post-war recession. It is reasonable to use G7 output as a proxy for world industrial activity in the 1970s, when emerging economies were much less significant.

Seven months after the May 1975 trough G7 industrial output had recovered by 5% versus the 7% rise in G7 plus E7 production between February and September this year. The first chart overlays the 1970s G7 path on current G7 plus E7 data, aligning troughs and rebasing the G7 series to equal G7 plus E7 output at the start of 2003. The comparison suggests that the recovery will be sustained during 2010 but  momentum will slow progressively from the spring into 2011. Output could regain its February 2008 peak level in October next year.

The downshift in momentum is clearer in rate of change data shown in the second chart. The implied slowdown in annual growth from a high to be reached in February 2010 is consistent with a recent peak and likely deceleration in G7 annual real narrow money supply expansion, which leads output by about six months – see previous post. Stock markets and other “risky” assets would probably anticipate slower economic growth later in 2010, suggesting a set-back early next year, although possibly after a significant further near-term gain. As the prior post explained, the liquidity backdrop may also turn less favourable for markets in early 2010.