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Global leading indicators: mixed signals

September 14, 2016

After a couple of months of absence the OECD Composite Leading Economic Indicators are back (OECD CLIs). So it's worth having a look at the CLIs to determine whether there are any interesting trends, signals, or turning points.  In this analysis rather than look country-by-country I will show you some of the more aggregated views such as breadth and diffusion measures as well as a look at emerging vs developed economies.

 

1. OECD CLI diffusion index vs global equities
This is a monthly diffusion index which sums up the number of countries seeing an increase vs decrease and scales it to 100; i.e. 100% = all countries indicators expanded on the month, 0% = all countries indicators contracted on the month. When overlayed against the MSCI All Countries World Index (ACWI) in local currency terms there is a clear pattern that a run down in the indicator often works as a leading indicator to bear market e.g. 2000 and 2008. Likewise surges in the indicator tend to line up with better stock market performance.  The trouble is the indicator has been chopping around the 50% mark; providing no clear lead for the market recently...

 

2. A symptom of "desynchronization"

The chart below shows clearly how the global economy has transitioned from more clear cycles where the breadth indicator (number of OECD leading indicators above the 100 mark) and the diffusion indicator have gone from fairly regular up and down swings to a more tight range in recent years. What is notable though is that the past couple of years have been characterized by soft global growth (both indicators were below 50%); but there has been no global recession. There has been pockets of recessions e.g. Brazil and Russia, and this highlights what I call the desynchronization of global growth.

 

3. Emerging vs Developed economies

This is easily apparent in this graph which shows the average CLI across emerging economies vs developed economies. After the post-GFC rebound developed economies sunk as the Eurozone sovereign debt crisis dragged that region into recession, and emerging markets eventually followed. Whereas the emerging markets double dip slowdown of 2015 was driven partly by the commodity collapse (which in the case of oil, was somewhat helpful for the more consumer driven developed economies).

 

So what's next?

 

Within all of the charts above there are some tentative signs of improvement, and the final graph shows both emerging and developed economies starting to turn up.  Whether this can follow-through to a period of more synchronised global growth is an open question, but for now the OECD leading indicators at a global level show a picture of fragile, gradual, and divergent growth. What may be needed is a policy shock e.g. a transition to more fiscal stimulus by the US, and ongoing stimulus efforts by China to kick the global economy out of its rut...

 

Bottom line: Global leading economic indicators have failed to provide a clear lead for global equities as global growth remains fragile, gradual and divergent.

 

 

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