Some indicators seem to show a bounce off the bottom for the global economy, among them a less rapid rate of contraction in the purchasing managers’ indices, a recovery in the Baltic Dry Index, strong loan growth in China and rising auto sales in India.
Unfortunately, the Organisation for Economic Co-operation and Development (OECD) composite leading indicators (CLI) , which are supposed to predict early signs of a change in trend, have continued to fall further in December, pointing towards a deepening of the slowdown.
The CLI for India was at 94.4 in December, falling 0.5 points in the month. That ties in nicely with industrial production contracting sharply in December. The CLI attempts to indicate turning points in economic activity at least six months in advance.
Also See No Sign Of A Bottom (Graphic)
The biggest falls in their respective CLIs in December were in Russia, China and Brazil, all emerging markets, although the indicator for Brazil at 98.8, is the best among all the countries. The OECD says that Brazil is in a slowdown, while all the other economies are in a strong slowdown.
Growth cycle phases of the CLI are defined as follows: expansion (increase above 100), downturn (decrease above 100), slowdown (decrease below 100), recovery (increase below 100). Clearly, with all the CLIs trending downwards in December, there are no signs of any green shoots of recovery.
The OECD leading indicator is also one of the best macro measures that indicate turning points in Asian stock markets, according to Macquarie Securities. They have pointed out that in four out of the last six cycles, the CLI has picked the trough in prices to the month.
It picked the trough in stock prices in March 2003, September 2001, September 1998 and September 1992. Interestingly, the CLI for India started to definitively show a downturn in January 2008, when it fell to 101.7 from 101.9. Coincidentally, January 2008 also marked the turning point in the Sensex.
Nevertheless, if we are determined to see some signs of hope a closer reading of the CLIs might provide a glimmer of it. That’s because the rate of decline in CLIs has been decelerating. For instance, the CLI for the OECD countries as a whole fell by 1.3 points in October, by 1.2 points in November and by 1.1 points in December.
At this rate, it’ll take a very long while before the decline becomes an advance, which is when a recovery is sighted.
Similarly, for the US, the CLI declined by 1.6 points both in October and November and by 1.4 points in December. For China, too, the CLI fell by 2.8 points in October, 2.7 points in November and 2.4 points in December.
But perhaps India is much closer to a trough. Its CLI fell from 0.9 in October to 0.8 in November and to 0.5 in December. If the deceleration in the rate of fall continues at the same rate as in December, the CLI could signal a bottom-forming as early as the current month.
But this kind of extrapolation may not really happen and it’s just putting lipstick on what is definitely a very ugly pig.
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