Leading indicators followed here suggest that the global economy will expand respectably through early 2014 (at least), a message supported by monetary trends.

The global leading indicators are derived from the OECD’s country leading indices, which combine information on economic and financial series that tend to move ahead of demand and output. The composition of the indices differs by country; the US index, for example, includes business and consumer survey responses, housing starts, new orders, weekly hours, share prices and the yield curve.

The OECD country-level data are aggregated and transformed to produce short- and longer-term leading indicators that have led turning points in global industrial output growth by an average of three and five months respectively in recent years.

The short-term leading indicator rose slightly for a second month in August, suggesting a modest pick-up in output expansion into late 2013. The longer-term measure, however, eased back after a recent gain, consistent with growth levelling off around year-end – see first chart.

The small decline in the longer-term indicator follows a reduction in global real narrow money expansion in June / July – monetary trends lead the economy by about six months, according to the “monetarist” rule. Real money growth, however, partially reversed this decline in August and remains historically solid – second chart. Monetary trends, in other words, are consistent with continued if moderate economic expansion through early 2014.

The emerging E7 component of the global longer-term leading indicator has risen recently, while the G7 component has declined – third chart. This coincides with a significant downgrade in the IMF’s growth forecast for emerging economies – the IMF always reflects the consensus view so is often a good contrarian indicator. These signals suggest adding to emerging market equities if forthcoming monetary data confirm that E7 real money growth has moved above the G7 level.