Global leading indicators still positive
Simon Ward
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The forecasting approach here seeks to identify future turning points in the global economic cycle using 1) real narrow money expansion and 2) short- and longer-term leading indicators derived from the OECD’s country leading indices, which combine a range of economic and financial information.
Global real money growth leads turning points in output expansion by about six months, versus recent averages of three and five months respectively for the short- and longer-term leading indicators.
Real money growth and the leading indicators have signalled solid global expansion during the second half of 2013 – see previous post here. June monetary numbers, however, were less upbeat, suggesting that momentum will fade at year-end, as explained in another recent post.
This warning signal has yet to be confirmed by the leading indicators. Both the short- and longer-term measures, indeed, rose in June, according to data released today – see first chart. Economic news, in other words, is more likely to strengthen further than soften through autumn 2013.
The recent renewed rise in the longer-term leading indicator follows an acceleration in real money growth between February and April / May, before the June drop – second chart. Unless this decline is reversed, the odds are that the indicator is at or close to a peak. A fall in July or August would warrant greater concern about an economic slowdown at end-2013.
The suggestion is that economic news will be supportive for equities and other risk assets in the near term. The greater danger for markets is a deterioration in the liquidity backdrop as stronger activity reduces the current excess of global real money growth over output expansion.
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