The G7 longer leading indicator calculated here rose again in October, providing further support for the expected scenario of a revival of global growth into early 2015.
The leading indicator is designed to predict turning points in the six-month change in industrial output. It bottomed in May, trod water over the summer and increased sharply in September / October – see first chart. The six-month output change has recovered from a low in August and should continue to rise through early 2015, at least.
Importantly, the G7 industrial pick-up is expected to reflect growth recoveries in Japan and Eurozone countries (i.e. Germany, France and Italy) rather than US acceleration. The Eurozone longer leading indicator rose again in October, confirming the recent positive message from monetary trends and signalling an early improvement in business surveys – see previous post and second chart.
In Japan, production projections from the METI survey suggest that the six-month industrial output change – still negative in October – will rise to about 4% (not annualised) by year-end. The output recovery follows a solid rebound in retail sales – third chart.
Previous posts (e.g. here) described a simple investment rule for switching between global equities and cash based on the G7 longer leading indicator. The rule prefers equities or cash depending on whether the leading indicator is above or below its long-run average. The indicator is now marginally above the average, suggesting benign conditions for equities. (The alternative rule based on G7 “excess” money growth continues to favour equities.)
