A forecasting indicator of global industrial growth derived from the OECD’s country leading indices declined further in May, suggesting that the current economic slowdown will extend at least through August, allowing for the typical three-month lead. This confirms the message from global real narrow money expansion, which fell sharply in early 2012 and usually leads activity by about six months. Both the leading indicator and real money growth remain positive so have yet to give a recession signal – see chart.

The slowdown in real money has tailed off since February 2012, implying that the decline in the leading indicator should slow over June-August. As discussed last week, real money growth may have bottomed in May, in which case the leading indicator could reach a trough in August and economic momentum three months later in November. Risk markets would probably anticipate a late 2012 economic turnaround by rallying from the late summer. Such a scenario, however, is possible rather than probable and a cautious investment stance remains warranted until a recovery in real money expansion is confirmed.