The OECD’s composite leading indicator indices are designed to predict industrial activity about six months ahead. They are an important forecasting tool but – like most economic series – are sometimes subject to significant revisions.

The first chart below shows annual growth rates of G7 industrial output and the OECD’s G7 leading index. The latter has recently fallen below zero for the first time since 2005. As mentioned in my last post, I expect G7 industrial growth to fall from its current 2.3% annual rate to 1% or lower by early 2008. Note that the leading index registered similar year-on-year falls in 1995 and 1998 – “soft” landings. Further significant weakness would clearly be concerning, however.

The next chart shows a regional / country breakdown. The G7 index has been depressed by a sharp fall in the Japanese component, in turn partly reflecting a slump in housing starts due to a new stricter procedure for construction approvals. Starts are expected to recover significantly by early 2008 as the new system beds in, reversing some of the decline in the Japanese index and supporting the G7 aggregate.

The chart also shows the US leading index holding up better than those for the Eurozone and UK. This fits with my view that the consensus is too fixated with US economic weakness and is underplaying downside risks in Europe.

The final chart shows that a composite leading index for the “BRICs” (Brazil, Russia, India, China) remains impressively strong despite the G7 slowdown. Continuing robust emerging-world growth is one reason for favouring a “soft” landing scenario for the G7.