The latest OECD report of composite leading indicators (CLIs) show that the global recovery shows signs of stalling. Note that CLIs do not reflect current business activities. They are aggregates of leading indicators that attempt to indicate turning points in economic activity approximately six months in advance.
Recent high-frequency indicators point to a slowdown in the pace of recovery of the world economy that is somewhat more pronounced than previously anticipated. Against this background and according to the OECD short-term forecasting models, growth could slow in the G7 economies to an annualised rate of about 1½ per cent in the second half of the year
So here's how I see it: what we're really seeing here is a sort of intellectual Wile E. Coyote moment. Back in May, the OECD was responding to social pressure, not economic logic. All the right people wanted austerity now now now, because, well, because, and the OECD went along. Now a bit of bad economic news has led the organization to look down, and realize that there's nothing supporting its position. But there never was.
From the press press release:
OECD composite leading indicators show signs of possible peak in expansion OECD composite leading indicators (CLIs) for July 2010 point to clearer signs of a moderation in the pace of expansion compared to last month's assessment. The CLI for the OECD area decreased by 0.1 point in July 2010.
In Canada, France, Italy, the United Kingdom, China and India there are stronger signals of a slower pace of economic growth in coming months than was anticipated in last month's release. Stronger signals that the expansion may lose momentum have emerged in Japan, the United States and Brazil. Tentative signals have also emerged that the expansion phases of Germany and Russia may soon peak.
The OECD Development Centre's Asian Business Cycle Indicators (ABCIs) show that the recovery of ASEAN economies keeps on track with some signs of moderation.
Here are some charts, showing coming peaks in major sections of the world economy, and even a downturn in China:
In his current Asian trip, President Obama visits Japan, then addresses a forum of leaders in Singapore, and eventually ends up in Seoul to discuss nukes and North Korea. But make no mistake, the axis of this week is the time Obama will spend in China, which has catapulted to the forefront of international affairs and is on its way to joining the United States as the alpha and omega of the global economic system.
That China has emerged is secret to no one, but the consequences haven't been fully integrated - either by the United States or by China. The level of intertwinement between the two economies has reached the point where they have effectively merged, forming what I've called an economic "superfusion." But that fusion hasn't yet altered political and cultural mindsets.
The ministers of the world still beseech the United States to "do something" about a weakening dollar, and U.S representatives on the eve of this trip announced that after the financial morass of the past 15 months, the United States "is back." Yes, the United States remains the world's largest economy - though technically the combined income of the European Union is greater. But size isn't everything - just look at Japan, which is still the world's second largest economy but whose influence and impact are substantially less. China may be poor on a per capita basis (perhaps $5000 per person relative to nearly $50,000 in the United States), but it is changing more rapidly and consuming more hungrily that any other society in the world. It is the change factor in the global system.
With a slew of major companies reporting earnings so far, it's clear that expectations were severely skewed to the negative. Once again, Wall Street analysts overshot - this time to the downside. The substantial margin expansion reported by Intel; the higher-than-anticipated profitability of IBM; and the blow-out quarters of Goldman Sachs and JP Morgan all stand in contrast to sentiment just a few weeks ago, which was grim and getting grimmer. So what happened?
First, the robust results of some of the banks so far is the result of trading revenue and changes in accounting rules rather than a sudden improvement in losses from bad loans. Still, income is income, and the more they generate, the easier it will be to absorb those losses from consumer, commercial and business loans that will continue to go sour for some time.
The following is an excerpt from a recent opinion piece of mine in the Wall Street Journal. For links to this and other writings, please feel free to visit River Twice Research.
The incoming Obama administration will face formidable challenges, but global economic collapse is no longer imminent. That may be small short-term comfort to the markets and Main Street. But having stared down the abyss, governments around the world appear determined to address root issues. The G-20 gathering of the world's major powers in Washington on Nov. 15 was only the beginning of a long and constructive process of revising the global system.
So the G20 met over the weekend, and if there was any doubt before, there should be none now: the financial balance of power is shifting. China, Brazil, even Japan can all claim more sound economies than the United States, and they collectively let it be known that they would no longer take marching orders from the Washington consensus. They expect a voice, and they are not asking permission
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