Previous posts have compared annual industrial output growth in the Group of Seven (G7) major economies with soft landing and hard landing scenarios, based on average experience in prior downswings over the last 40 years. I have been expecting an outcome closer to the soft landing path in 2008, with major economic weakness possibly delayed until 2009 / 2010 (see here).

Based on partial data, annual growth appears to have fallen below 1% in April but is still reasonably close to the soft landing scenario – see first chart. As suggested in my last update, the annual change could fall close to zero by mid year, reflecting further credit tightening and commodity cost increases in early 2008.

If the historical comparison is still relevant, growth should show some recovery in the second half and into early 2009. Prospects of such a pick-up have been damaged by the recent oil price surge but my survey-based leading indicator registered a small increase in May, consistent with a possible mid-year trough – see second chart. More data are clearly needed to confirm this scenario.

Historically, recoveries following soft landings have been of short duration, partly because inflationary pressures quickly re-emerge, necessitating policy tightening. As the first chart shows, the soft landing path turns down sharply from early 2009. Any improvement in global economic news during the second half should be regarded as temporary relief.