Leading indicators softening, real money reassuring
Simon Ward
The OECD's leading indices for March confirm a loss of global economic momentum suggested much earlier by monetary trends – see January post.
The first chart shows the six-month growth rate of combined industrial output in the G7 and emerging "E7" economies together with a forecasting indicator derived from the OECD indices, which incorporate a wide range of economic and financial inputs. The indicator peaked in December and fell again in March, suggesting that output will slow into the summer, based on the usual 3-7 month lead.
Monetary trends are signalling a slowdown rather than anything worse. G7 real narrow money is still expanding and the lower rate of increase recently reflects higher inflation, with nominal growth boosted by the Federal Reserve's QE2 securities purchases – second chart. A reversal is possible after QE2 ends at mid-year but this would affect the economy only from early 2012.
Interestingly, the recent decline in the forecasting indicator has been due to the G7 rather than E7 component – third chart. Within the E7, the OECD indices are signalling a slowdown in Brazil, India and Russia but continued strength in China. Chinese resilience, however, is at odds with recent monetary trends and, if correct, implies further policy tightening, which would increase the risk of a "hard landing" later in 2011.
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