The OECD’s G7 leading indicator is estimated to have fallen further in July, although the six-month rate of change remains above a February / March low. These developments are consistent with the forecast here that global industrial momentum is bottoming in Q3 but will remain weak into early 2020.

The OECD will release July data for its leading indicators on Monday but information is available for most of the components, allowing an independent calculation. The indicators are presented in ratio-to-trend form, so a fall signals below-trend economic expansion (or worse). The G7 leading indicator posted another large decline in July, with the recovery in the six-month rate of change stalling – see first chart.

The indicators are widely monitored and the downbeat July reading may be interpreted as confirming an apparent recession signal from inverted yield curves. There is, however, a danger of double-counting, since the OECD indicators for the US, Japan, Germany and Canada include the long yield / short rate spread as a component.

To investigate this issue, a modified version of the G7 indicator was calculated incorporating measures for the above countries excluding yield curve components. As the second chart shows, the modified indicator is only slightly less weak than the official version, i.e. the other components are giving a similar message to the yield curve.

The forecast that global industrial momentum will remain weak reflects a so-far modest recovery in global six-month real narrow money growth from a Q4 2018 low. Real money growth fell in July, although the final reading was above a preliminary estimate discussed in a previous post, mainly reflecting Euroland strength – third and fourth charts. The July setback reflected Chinese weakness; August data will be important for assessing whether this was “noise” or – more likely – signals a need for more significant monetary policy easing.