Economic Growth Is Slowing & What This Means For Investors

In a recent post I opined how the stock markets internals are weakening, whilst also briefly touching on how a couple of leading economic growth indicators are beginning to roll over. Within this article, I intend to delve a little deeper into the various leading economic indicators to assess where we are in the current growth cycle and what this means for investors. As I discuss below, my reading of the current environment is relatively clear; both the longer-term and shorter-term leading growth indicators are pointing toward the heightened possibly of slowing cyclical growth. As a result, these downward trends suggest investors ought to be rotating out of the reflation and cyclical trades and into the defensive counterparts, or reducing risk entirely.

Beginning with the longer-term leading data, almost all of the variables I monitor peaked earlier this year and are now rolling over or trending downward. My favourite of which is the China credit impulse. Credit impulse measures the rate of change of new credit creation by both commercial banks and fiscal budget deficits. As it stands, credit creation is the truest measure of money creation and thus leads many economic variables by around 10-12 months. We can see the credit impulse from China peaked some months ago and has since turned negative. This is important as China remains the worlds largest manufacturer and drives much of the worlds business cycle.

Source: TopDownCharts

Source: TopDownCharts

Drilling deeper into the commercial bank credit creation process, we can see commercial bank lending on a year-over-year basis has been trending downward for the past 12 months and is now in negative territory.


To me, despite the impending shift to fiscal dominance and central planning, credit growth in the private sector is still the best driver of the economy and is one of the more reliable indicators of long-term growth prospects. The fact that growth in private sector credit is now contracting is worrisome. We can extrapolate this further by analyzing the private sector loan-to-deposit ratio. A falling ratio indicates money is not leaving the banking system and being spent in the real economy, but instead remains trapped within the banking system. This ratio can be thought of almost as a proxy for the velocity of money. The loan-to-deposit ratio has been in a downward spiral ever since the COVID-19 crisis began.