Monetary trends and leading indicators continue to suggest that global industrial output expansion will moderate from a peak to be reached in the second quarter of 2013. These forecasting measures have yet to warn of serious economic weakness.

The chart shows six-month growth rates of global industrial output and real narrow money together with a leading indicator derived from OECD data*. Real money growth and the leading indicator typically signal economic changes about half a year in advance. The latest data points in the chart are for February 2013.

Output expansion has recovered in early 2013, consistent with a pick-up in real money growth and the leading indicator from spring 2012. The real money measure, however, peaked in October 2012, falling modestly through February 2013. This downshift has been confirmed by a decline in the leading indicator since December 2012. Allowing for the half-year lead, these developments suggest that output expansion will reach a peak between April and June 2013 and moderate over the summer.

Real money growth and the leading indicator are currently still at respectable levels by historical standards. Monetary trends, however, bear close scrutiny – US weekly data suggest a sharp slowdown in March, which will pull down the global real money measure barring an offsetting rise in other countries.

Global economic slowdowns in 2011 and 2012 were associated with significant falls in equities and other “risk” assets. Liquidity support, however, may be greater now than then – real money growth remains above output expansion, suggesting that there is “excess” liquidity available to flow into markets, while ongoing US and Japanese QE programmes will provide additional policy stimulus.

*”Global” = Group of Seven (G7) major countries plus seven large emerging economies (the “E7”). The leading indicator is termed a “double-lead” measure because it is designed to provide earlier warning of cyclical turning points.