OECD leading indicators released next week should confirm that global economic growth is moderating, in line with the forecast here. Monetary trends, however, suggest that the slowdown will be modest and temporary, with growth lifting again from the summer.

The first chart shows the OECD’s “normalised” G7 leading indicator, constructed so that a stable value implies economic expansion at trend. A peak in the indicator, in other words, signals that growth is about to shift from above to below trend. The chart shows actual data up to December 2013 together with a series estimated here by attempting to replicate the OECD’s calculations using the latest component information. The estimation suggests that values for November and December will be revised lower, while the indicator will fall marginally in January. The new OECD data, in other words, may strengthen market perceptions of a slowdown in growth in early 2014.


The second chart shows global (i.e. G7 plus emerging E7) industrial output growth together with short and longer-term leading indicators constructed here by combining and transforming the OECD’s normalised indicators for the G7 and individual emerging economies. These short and longer-term measures have led growth turning points by averages of 2-3 months and 4-5 months respectively in recent years. The latest values are again estimated; the short leading indicator is likely to fall further in January while the longer measure may stabilise at a weak level.


The bias here, however, is to downplay the cautionary message from the leading indicators, for two reasons. First, recent weakness may have been exaggerated by the impact of bad weather on several of the components (e.g. US housing starts). As this effect unwinds, the trend estimates of the components incorporated in the indicators should be revised higher. The recent declines, in other words, may look smaller in three months’ time.

Secondly, the leading indicators are used here to confirm signals from global real narrow money expansion, which has led output growth turning points by an average 6-7 months in recent years. Real money expansion declined between May and September 2013, anticipating current economic softening – third chart. It bottomed at a respectable level, however, and has picked up in December / January, with US strength likely to result in a further rise in February – see previous post. Monetary trends, in other words, suggest that the slowdown will be modest and growth will regain momentum, led by the US, from mid-2014. Such a scenario, in turn, implies that the longer leading indicator should be at or close to a bottom.