The OECD's leading indices are signalling a further slowdown in emerging-world growth, consistent with earlier and continuing monetary weakness.
The forecasting power of the raw indices can be enhanced by data transformation, resulting in an indicator with a longer lead time. For the "E7" economies (defined here as BRIC plus Korea, Mexico and Taiwan), this indicator is below a low reached in spring 2010 before a summer slowdown and suggests that six-month growth in industrial output will fall from 5.4% in April to about 2% by late 2011 – see first chart.
As previously discussed, six-month E7 output changes are closely correlated with industrial commodity price fluctuations (0.87 correlation coefficient over the last 15 years). Based on the historical relationship, a six-month output rise of 2% "forecasts" a 4% fall in commodity prices (as measured by the Journal of Commerce index, which includes energy).
Six-month growth in E7 real narrow money has continued to slow, suggesting a further decline in the leading indicator. Real money, unusually, is now growing faster in the G7 than the E7 – second chart. (The chart includes data up to April so excludes the further slowdown in Chinese real M1 in May – see yesterday's post.) The G7 monetary pick-up may offset E7 weakness, maintaining global economic expansion, albeit at a slower pace than in 2009-10.
