The global longer leading indicator followed here suggests that economic growth will strengthen through the current quarter before stabilising / moderating later in 2014. This is consistent with recent narrow money trends.

The longer leading indicator is derived from OECD data and gives advance warning of turning points in six-month industrial output expansion. The average lead time in recent cycles has been five months. The indicator rose sharply between January and April, suggesting a pick-up in output growth from June through September, based on the average lead. It partially retraced this increase in May / June – see chart.

This pattern mirrors recent monetary developments: global six-month real narrow money expansion, which typically leads the economy by about six months, rose between November and February before easing slightly over the spring – see previous post for more discussion.

The recent declines in real money growth and the leading indicator are too small to warrant concern about growth prospects. Both have been affected by Japanese data volatility due to the April sales tax rise. Real money expansion stabilised between May and June, suggesting that the leading indicator will level off in July, allowing for the former’s slightly longer lead. Real money trends, moreover, should be supported by a near-term slowdown in consumer prices and recent lower market interest rates.