OECD Slowdown Signal Is Broad; The Covid Cycle: Drop-Rebound-Decay

The main regions of the OECD leading indicators show declines in June. The all-area OECD metric, EMU members of the OECD, and the U.S., show small 0.1% declines with Japan showing a flat reading month-to-month for the second month in a row. Over three months, all regions show declines ranging from 1.6% to 2% except for Japan that logs a 0.3% increase. Over six months, all regions except Japan also showed declines like their three-month declines. Over 12 months, all regions show increases. The leading economic indicators led by the U.S. have a 4.5% gain followed by the top seven OECD countries with a 4% gain. Japan shows the weakest gain at 2.7%. The data show weak economic signals as a recent event. Evaluating the current indexes according to their queue percentile standings, Japan has the highest standing with a 75.7 percentile standing; the other regions, the OECD, the top seven OECD countries, the euro area members of the OECD, and the U.S. have standings in their respective lower 30th percentile of their historic ranges. These rankings are based on the levels of the indexes in June. Current standings are broadly weak.

The second panel of the table shows changes in averages to smooth the process out. These panels give roughly the same signals as in the top panel, showing declines in May and June with the declines over the recent six months and even over six months ago. The six-month change of 12-months ago shows across the board increases.

Looking more closely at regions and individual countries and evaluating them by the level of their indexes in the bottom panel of this first table, we see indexes below 100, indicating below-normal growth for all entries except Japan. This is true for June and for May observations; in April, Germany shows a value that is not below 100. In March, only the OECD, the European Monetary Union, Japan, and Germany show values at or above 100. However, apart from these exceptions, we see evaluations of growth below normal for all these countries and regions. March is right after Russia invaded Ukraine and it is when the Fed's rate hikes began. The change column marked 'now' looks at the ratio of the current observations to six-months ago which is a favorite way to evaluate these leading indicators: on that basis, only Japan is higher in June then it was six-months ago. The far-right hand column evaluates these current indexes historically. On that basis, only Japan and Germany have standings above their 50th percentile; that level marks their historic medians. The weakness indicated by the economic indicators is broad-based and has worsened since March.

Table 2 below chronicles a group of 13 developing economies. We find 12 of 13 weakening month-to-month in June after doing about the same in May. In April, Mexico deviates from this pattern of weakness with an unchanged assessment for the third month in a row; Slovenia and Slovakia also are unchanged. Over three months, these countries show weakness across the board. Over six months, all are weakening except Mexico (it shows a small gain) as does Slovakia with Slovenia unchanged. Over 12 months, Mexico, Slovakia, and Slovenia are the only exceptions to across-the-board declines in the leading indicators.

Evaluating growth by looking at the level of the indexes, we find the readings are below 100 indicating subnormal growth in all countries for June except Mexico, Slovenia, and India.

Changes, indicated by the ratio of the current value to six-months ago, show all regions with weaker growth in June than six-months ago except Mexico, Slovakia as well as Slovenia, the latter with conditions unchanged from their six-month-ago value.

Using the current index values to rank in the historic profiles, there are only three countries in the table with values ranking above their historic medians (above value of 50%); these are Mexico, Slovenia, and India. The rest of the group accounting for nearly 77% of the group shows values below their 50% mark and for most of them below their 30% mark. Chile, Hungary, and Indonesia post single-digit rankings.

These evaluations confirm that growth compared to long-term metrics is weaker than normal. It tells us that growth is weakening over six months and it tells us that the composite leading indicators have been weakening month-to-month for several months at a row. These are reinforcing factors that point to a broad slowdown in the global economy.

At the same time, we know that inflation has been excessive and that central banks around the world generally are raising interest rates to try to contain inflation, a factor that is going to slow growth and will emphasize these slowing trends. There can be little doubt that there is a further slowdown in the future for the global economy. It's going to spread across developing and developed economies alike.