Economy in Brief

The OECD leading economic indicators normalized or amplitude adjusted uniformly show that expansion is still underway in the global economy. The OECD-7 metric is up by 0.1% in September for the normalized leading indicators after being flat in August. There are positive expansions indicated over 12 months, six months, and three months. Apart from looking at growth rates, the level of the indicator for the OECD 7 has a 55.8 percentile standing, placing it above its historic median value. For the core group of OECD countries, expansion remains firmly signaled underway, even if not strongly.

The normalized indicator for Japan is flat in September after being flat in August. It shows a decline over 12 months but net increases over six months and three months with a queue percentile standing on the index at 50.7% which barely puts Japan over its median and puts it into growth territory; however, it does stay in growth territory slightly above median growth.

For the United States, the change in the normalized leading indicator in September is zero after zero in August as well. The U.S. has an increase of 0.1% over 12 months; it increases to 0.3% at an annual rate over three months and six months, hardly strong readings. However, the queue standing on the LEI level for the United States has a 57.2 percentile standing, a solid standing, clearly above the historic median (at a 50% standing) and clearly putting the United States into growth territory.

The OECD likes to look at six-month changes in its metrics. The second panel of this table looks at the changes in six-month averages month-to month and the net change over six months over progressive 6-month periods. On this score, we see September and August expansions in the OECD-7 grouping as moderate and consistent increases in September and August. For Japan, there are small consistent increases; from the United States strong increases in September and August. China logs two severe monthly declines. However, over broader periods based on six-month changes, we see increases logged even for China. The exception is having a decline from 6-months ago in Japan in its six-month change. Turning to the queue percentiles where we rank the different regions or countries on six-month growth rates, the OECD 7, Japan, and the U.S. have percentile standings in a range of 55% to 65% clearly above their historic medians while China comes in with a standing at its 39th percentile below its historic median.

The bottom panel of the chart shows the amplitude adjusted leading indicators from the OECD and here we look at the levels of the indicators with levels above 100 indicating normal to above normal growth and levels below 100 indicating below normal or below average growth. We see negative scores for France, Italy, Spain, and China consistently over the last four months. The ratio of the current index to six-months ago provides a negative reading for Spain and for China. The other metrics in the table signal ongoing expansion in the United States, the United Kingdom, Japan, the OECD 7, and Germany. These are relatively broad readings indicating continuity and global growth. However, the growth rates aren't particularly strong. For example, the German index has only at 50.7 percentile standing, the same as Japan's. These are razor edges standings, barely above their historic medians but again signaling growth but growth that is above the historic median value by only a small margin. The OECD 7 has a standing at its 55.8 percentile. Italy, France, and the United States have readings that are in their 57th percentile, again, relatively firm above their historic medians. For now, the strongest reading is coming from the U.K. with a 93.5 percentile standing. Spain and China both have percentile standings below their 50th percentile and are at the mid-30th percentile mark.

In this week’s letter, we focus on political uncertainty and its potential risks to economic growth. We begin with Japan, where the long-ruling Liberal Democratic Party (LDP) faced a significant electoral setback last weekend, losing its ability to form a majority in the lower house, even with its coalition partner's support. This development has sparked a period of political flux, complicating efforts to predict Japan's policy trajectory. Market reactions have partially reflected these concerns (Chart 1), though responses to the Bank of Japan's decision to maintain its current policy settings have been muted (Chart 2), which is understandable given that the outcome was largely anticipated.

The uncertainty surrounding elections extends to the United States, where the presidential race between Donald Trump and Kamala Harris remains too close to call by many measures. Observers are particularly interested in how the election results might impact relations with China. US-China relations have been the focus of various trade-related measures by the US over the past decade, including tariffs and product controls (Chart 3). However, it's worth noting that the US's hawkish stance on China may well persist regardless of the incoming president. On a more optimistic note, expectations for China’s near-term growth have improved (Chart 4), bolstered by a recent series of easing measures from its authorities. Nevertheless, uncertainty lingers regarding the economy's ability to achieve its 5% growth target for the year.

Finally, we examine developments in other advanced Asian economies, where industrial production growth has shown signs of easing in recent months (Chart 5). We discuss the potential implications of continued declines in this growth on exports and, consequently, on the growth rate of these economies, many of which rely heavily on exports as a primary growth driver (Chart 6).

Japan’s lower house elections and the October BoJ meeting Japan’s ruling party, the Liberal Democratic Party (LDP), experienced a significant electoral upset last weekend, losing its majority in the lower house of Parliament. Even with the support of its coalition partner, Komeito, the LDP is now unable to form a majority. This shift puts Prime Minister Ishiba's position at risk, as he may need to seek support from parties outside his usual allies to advance his policy agenda if he remains in office. Given this uncertainty, political maneuvering is expected to intensify in the coming weeks, with a special parliamentary session scheduled for November 11 to elect Japan’s next Prime Minister. In response to the initial news, the yen weakened further, reflecting market concerns, while equities saw a slight uptick (Chart 1).

On the month, 7 of 18 countries reported weaker manufacturing PMI results than they had the month before. However, the median on a month-to-month basis didn't change at all. Sequentially looking at averages over 12 months, six months and three months, we see the median hasn't changed very much across that span either. It has stayed just below the value of 50, which indicates unchanged output, oscillating between values of 49.6 and 49.7. That's a great deal of consistency for these averages over these three different multi-month segments. All this as global trade growth has come to a halt according to the Baltic trade volume index.

The bottom line is that there isn't really a lot of trend in these overall data and the conditions of economic weakness remain in force although it's weakness of the mildest sort, technically below the value of 50 but - for the most part – these are numeric figures that would round up to a value of 50!

The queue percentile standings show that among these 18 observations, only 6 have values above their historic medians; that would refer to any queue percentile standing value of about 50%. The average percentile standing across all 18 reporting units is at 48.6, again fairly close to breakeven; however, the median value is only at 36.8% - the median is significantly weaker than the average.

As a group, the strongest reporters are the ‘BRIC’ reporters, with queue percentile standings at 54.4% for China, 35.1% for Russia, 73.7% for India, and 61.4% for Brazil. The weakest reporters in the table are Turkey at a 7% standing, France at a 17.5 percentile standing and Indonesia and a 19.3 percentile standing.

Looking at changes since January 2020 when COVID began to emerge, ten of the 18 reporters have even weaker values today than they had in January 2020 while the strongest reporters are Russia 2.7 points higher, India 2.2 points higher, and Brazil 1.9 points higher. No other country has a gain relative to January 2020 any stronger than 0.7 points.

Looking at the breadth of improvement, 66.7% improving compared to where they were 12-months ago; we see 38.9% improving over six months compared to over 12 months and 27.8% improving over three months compared to six months ago. This trend is unnerving, showing smaller, and smaller, proportions of reporters that are doing better than they had been doing over the previous period. And this is not good news even though the diffusion median value hasn't changed very much nor have the various period averages.