Global recovery continuing but momentum ebbing
Simon Ward
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Global industrial output – as proxied by combined production in the G7 major countries and seven large emerging economies (the "E7") – rose by a further 0.6% in April to stand just 1.4% below the pre-recession peak reached in February 2008. With business surveys signalling further gains, output is likely to reach a new high by late summer – see first chart.
A composite leading index derived from OECD country indices (except for Taiwan, for which a national series was used) also continued to rise in April but the 0.4% monthly increase was the smallest since February 2009. The index appears to be converging with the long-run trend path of output, with this trend implying growth of 3.4% per annum – first chart.
The loss of momentum of the leading index is clearer in the second chart, showing six-month growth rates. Pessimistic commentators suggest that this slowdown will intensify and is an early warning of renewed output weakness in late 2010 and 2011 – the dreaded "double dip".
Global narrow money trends, however, have yet to support such a scenario. Real M1 led output and the leading index around the recession trough in early 2009 and again at the recent momentum peak – third chart. Six-month growth has slowed significantly but remains solid and may be stabilising, suggesting that output and the leading index will continue to rise, albeit at a much-reduced pace.
The best guess here remains that the current recovery will follow the pattern of the output revival after the mid 1970s first oil shock recession, implying a mid-cycle "pause to refresh" in late 2010 and 2011 followed by renewed acceleration from late next year – fourth chart. Further weakness in real M1, however, would demand a rethink. A 2011 global slowdown, moreover, could involve stagnant G7 output, allowing for much faster E7 trend growth.
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