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Latest OECD Data Shows Global Economy in State of Flux

February 15, 2013

by Steve Rumsey

of Optimus Advisory Group

According to the OECD ("Organisation for Economic Co-operation and Development"), the US economy managed to stage a leading indicator "rally" into the most favorable northeast quadrant. The red six month lagging tail on the graph clearly shows the economic leading indicators moving from expansion to slowdown, only to move back to the expansion quadrant in late 2012 (the red circle is the last data point for November 2012).*

As for the global economy, its six month lagging tail shows a more muted journey. While it follows a similar path of the US economy, the broader global economy's leading economic indicator is just now moving back towards the expansionary quadrant, though it is still in slowdown mode.

Europe, Asia & Emerging Markets tell varying stories

The European debt crisis had the European LEI in the recessionary quadrant for all of the last six months, with it just now moving towards the recovery stage.

With a slowdown in some of the larger Asian countries, the Asian LEI finally moved from the recession quadrant to the recovery zone.

Of the BRIC countries, Russia seems to be having the hardest time righting the ship, with its LEI moving from slowdown to recession.

We think the big question is can the global central banks provide enough quantitative easing to keep the global economy afloat under the increasing weight of austerity, debt burdens and Fiscal Cliff 2.0? Currently, these leading indicators seem to be giving a mixed message as to where the global economy is headed.

*Interpreting the Business Cycle Clock

The OECD Business Cycle Clock has been designed to better visualize business cycles - fluctuations of economic activity around their long term potential level - and how some key economic indicators interact with the business cycle. (In our framework the industrial production series represent the business cycle for each country.) The Business Cycle Clock is a dynamic tool which lets us perceive the leading, coincident or lagging behaviour of the other indicators presented.

4 Quadrants for 4 stages of the economic cycle

The quadrants on the graph represent four distinct stages of the economic cycle. As the indicators are presented in their trend-removed form, values above 100 (upper half of the graph) represent an economic activity above long-term average or long term potential. The horizontal axis captures the dynamic aspect of the cycles; series in the right half of the graph are in an increasing phase. As a result the four quadrants represent four stages of the economic cycle:

Expansion – series is increasing and above 100;

Slowdown – series is decreasing but above 100;

Recession – series is decreasing and below 100;

Recovery – series is increasing but below 100.

© Optimus Advisory Group