Leading the Way
Each month the OECD publish its Composite Leading Indicator. This includes data covering 33-member countries (UK, US, European states etc) in addition to the 6 non-members comprised of Brazil, Russia, India, China, Indonesia and South Africa.
The CLI uses an algorithm to sift and compile data from each of these member countries. The index is made up of various factors such as:
• Manufacturing production levels and order books
• Employment levels
• Business confidence and trends in the relationships with key trading partners
• Stock market health
Leading indicators can be powerful. Being partially sentiment driven, the direction of the charts produced often turns up or down in advance of changes in economic activity.
Within the CLI data analysts at the OECD are also looking to identify deviations from the longer-term trend, hoping to detect a turning point. It seeks to predict either a slowdown or expansion with a 6-to-9 month lead time.
As you can see from the chart below the CLI index has been falling and reflecting the economic slowdown already underway. It is very easy to feel discouraged about future growth prospects when looking at this chart because the data does not appear to be picking up anything positive. However, there is more to this story.
CLI of OECD Member & Non-Member Countries Over Time
Source: OECD, April 2019
Beneath the CLI headline data there is individual data for each country and this is where we discovered a different trend, something much more positive. As mentioned earlier, the CLI data series comprises 33 countries. Therefore, aggregate data can mask country by country shifts taking place.
In the chart below, we show the proportion of countries in the aggregate series that are improving. More than a third of countries (35%) in the series are reporting month on month improvements and the direction of travel is pronounced and moving upward. To put this into context, markets panicking about growth slowing last August were able to point to just 11% of countries in the sample showing improvements at that time.
Proportion of OECD Member and Non-Member Economies Reporting Month on Month Improvement in CLI Data
Source: OECD, April 2019
Diving even further into the data we note emerging economies (EM) are pushing ahead of developed country economies. EM’s have been implementing policies to drive economic growth, reflecting their leadership style of free market thinking. The countries leading are the ones we have highlighted in recent weeks including, India, Brazil and China (we should add China reported a very marginally negative result, but manufacturing data is now demonstrating signs of improvement).
Normally the OECD constituents demonstrate synchronicity and the decoupling witnessed is unusual. However, it will be temporary if, as we suspect, developed economies respond to their own growth policy initiatives. If we are correct, and economic growth in developed economies begins to pick up, this will be very positive for future, synchronised, global growth.