The OECD’s G7 composite leading indicator (CLI) strengthened in May, providing further confirmation that the global economy was picking up before the Brexit vote shock. The global impact of the shock is expected here to be minor and offset by a post-vote loosening of financial conditions – the forecast of a rise in growth during the second half, therefore, will be maintained, unless narrow money trends weaken.

The OECD was due to release May leading indicator data on Monday but instead announced that publication would be suspended until September, on the grounds that the Brexit vote was a “significant unexpected event, which is affecting the underlying expectation and outturn indicators used to construct the CLIs”. This is a strange decision: the OECD has never before suspended publication of its entire suite of indicators in response to a shock and it seems a stretch to argue that the Brexit result is more significant than some previous unexpected events (e.g. the 911 terrorist attacks)*.

It is, however, straightforward (if laborious) to replicate the OECD’s calculations to estimate the May data. The first chart shows published and estimated values of the “normalised” version of the G7 leading indicator – rises / falls signal that future GDP growth will be above- / below-trend. This fell steadily during 2015 and early 2016 but stabilised in April and is estimated to have risen slightly in May. The indicator, that is, suggests that growth was on course to move from below- to above-trend during the second half, before the Brexit vote shock.


The second chart shows an alternative version of the indicator designed to predict the level of industrial output rather than the ratio of GDP to trend. The six- and one-month changes in this indicator continued to firm in May, clearly signalling a coming rise in industrial output momentum.


The US component of the G7 indicator has been the main driver of its recent pick-up. The six-month and one-month changes in the US indicator strengthened further in May, confirming an earlier positive signal from faster real narrow money growth – third chart.


The Brexit vote result has the potential to depress the G7 leading indicator via impacts on business / consumer surveys, yield curve slopes and stock prices**. The MSCI All-Country World Index in US dollars, however, has already rebounded to above its level before the 23 June vote, while yield curve flattening has started to reverse. Any survey weakness should be mitigated by expectations of easier monetary policy and may prove temporary.

*The Japanese indicator only was suspended for two months following the March 2011 earthquake / tsunami.
**All G7 country indicators contain at least one business survey component. All except Japan and Germany include consumer sentiment / confidence. The slope of the yield curve is a component of the US, Japanese and German indicators. Stock prices appear in the US, Japanese, UK, French and Canadian indicators.