Looking first to the broadest of measures, the OECD plus six, while it remains above 100 and therefore signalling global expansion, the wind has clearly come out of the world’s economic sails. Turning to the rate of change in the leading indicator to get a sense of the momentum in growth, we see that it too is signalling that things are likely to get worse before they get better.  There are no signs of finding a floor as yet, rather if anything it the pace of the decline is accelerating.

A quick survey of the CLI’s for the US and the Eurozone shows that it is these regions that are leading the slowdown – with at least the Eurozone likely to tip into contraction before the end of 2011.

Perhaps more encouraging for commodity exporters, the composite leading indicator for China looks like it may be making small steps towards pushing higher with the rate of change in the indicator starting to claw its way back up. If 2010 is any guide, then perhaps the Chinese construction machine has returned to the building site once more.

Composite leading indicators (CLIs)…point to a mild loss of growth momentum in most major economies for April 2011. A notable exception is the United States which continues expanding relative to trend, albeit more moderately than in last month’s assessment. The CLIs point to a stable pace of expansion in Germany and the United Kingdom, clear signs of slowdown in the pace of activity in France and Italy, and a likely moderation of growth towards its long-term trend in Canada. The CLI for China points to a possible moderation in economic activity. Other CLIs indicate a slowdown in Brazil and India and the first sign of a loss of growth momentum in Russia.

Looking to the individual charts – we can see the expansion ‘relative to trend’ in the US, but looking to the rate of change in the indicator, the portents suggest that the expansion has begun to take on water.

While in the Euro Area, the indicator has already peaked. The question now is whether growth will be replaced with an outright contraction – we won’t know the answer to this until the second half but with the ECB raising rates, the outlook is far from bright.

Looking to the bellweather for commodities – China – it is now decelerating at a pace only rivalled by that achieved in the GFC. Given the muddy waters around official statistics, perhaps the best we can say is that the measures to tighten liquidity are slowing things down a touch.

(Note that the OECD has adjusted the amplitude of this data series – making for larger swings in the indicators – still the trends in data remain the same.)

In the US, growth was heading towards a cyclical high relative to trend, but again looks likely to peak over the next three months:

Interestingly growth out of China looks to be regaining some momentum

While in the Euro area, growth has already peaked and is likely to struggle on in the face of the ECB interest rate rise.

Finally, as a counterpoint to the OECD’s data, following is the latest JPMorgan Manufacturing PMI (from Markit here) that hints at the same sort of conclusion – that the global growth rate has peaked but remains in expansion mode.

According to Markit, the index (ex-Japan) is indicating an annualised growth rate of 2.5%-3.0%, versus a rate of 3.5% in the first quarter. (Including Japan, the rate was 1.5% – 2.0%.)

The CLIs for Germany, Japan, and the United States continue pointing to robust expansion relative to trend. Signs of regained growth momentum characterise the CLIs for France and Canada. The CLI for the United Kingdom points to a slow but stable pace of expansion. The CLI for Italy continues pointing to a moderate downturn.

The CLIs for other major economies are little changed from last month’s assessment. The CLI for China continues pointing to the possibility of a moderate downturn. The CLI for Brazil remains near its long-term potential. The CLI for India continues pointing to a slowdown relative to trend and the CLI for Russia continues pointing to expansion.

While the headline expansion continues apace in the US and Europe, the momentum of the indicators looks to be peaking.

While China has its nose pointed to the water:

Rolling it all into one, we get an expansion that looks sound but is waning in intensity.

These indicators are docile creatures that tend to be slow to move but, once started, are difficult to stop. Reading a turn into the developed world indicators might be premature but given the expected tightening in global money (ex-Japan) over the next six months has a reasonable basis. Think we can expect the aggregate indicator to roll over by June.

And even, the Euro area is taking heart – at least in aggregate:

But it’s the emerging markets that are struggling against the liquidity currents – China taking the lead in tightening money that, in the OECD’s soundings for November, was just beginning to work its magic:

Tighter credit is hanging albatross-like around China’s equity markets, yet largely being ignored by commodities. It seems unlikely that both price trends can be sustained, even given the supply constraints that will result from recent Australian floods.  Recent history would suggest emerging markets bounce from here – though ultimately, given a choice between higher consumer prices and lower equities, I’m guessing that the Chinese authorities wouldn’t give a damn about their banks.

Chinese equities led commodity markets to the bottom and back up again. The prevailing downtrend in relative prices does not auger well for commodity prices over 2011.

If China does slow appreciably, Australia will be wishing it had some of the newer fangled technologies to keep its economy afloat. Old world wet sails are a positive nightmare without the wind at your back.

OECD composite leading indicators (CLIs) for September 2010 point to diverging patterns of economic growth across major economies. The CLIs show signs of continuing expansion in Germany, Japan, the United States and Russia, while pointing to a moderate downturn in Canada, France, India, Italy and the United Kingdom.

The September OECD data aligns nicely with the new export orders that Markit reported on the other day (here). Essentially, there has been a changing of the guard with emerging economies slowing, while the leading indicators for the larger economies of the developed world are still in expansion mode.

Flicking through the leading economic regions, the pattern is reasonably consistent:

Note that these readings were taken before the latest QE and currency gyrations.  Given the increasing odds of further fiscal stimulus in the US (roads, rail and runways) and in China (given its exports are about to be slapped with tariffs or the like) – coupled with rising global liquidity – the government sponsored buy risk campaign has legs.

We’ll leave the rising systemic risk for another day.

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.

This is the slowing in expansion ‘momentum’ that the risk markets were fixated on until about a week ago when a slew of data from China and the US have allayed our collective fears. So is the slowdown in the broadest of indicators old news?

Not necessarily. One lesson that we’ve learnt from watching these indicators is that they are slow to turn – this suggests that the slowdown has some way to run as the developed economies decelerate into austerity land. Guess that is very different from a double dip though.

It’s the emerging markets that are still bearing the burden for global economic growth. In particular China, as the recent data releases suggest, looks to be turning towards the sun once more – with the deceleration in growth likely to level off over second half of the year.

And to the sunburnt land. Still a picture of bronzed, beach loving health.

‘Possible peak’?  Looks pretty much like it is a near certainty.  With Europe yet to feel the effects of the communal belt tightening and the US struggling to come to terms with its deteriorating government balance sheet, the economic momentum is favouring the downside.

But perhaps it is not all gloom.  It may be that the recent bounce in Chinese equities is reflecting a turn for the better in growth expectations:

While the leading indicator for China has been heading south for some time, it is still in expansion mode and by the looks of the rate of change in the CLI may be starting to find a base.  The ‘rate of change’ in the CLI has proven to be a reasonably useful leading indicator of the stock market over the last couple of years – and over recent months its downward momentum has slowed.  Okay – it may be a bit of a stretch to claim the second derivative of a composite leading indicator is looking good.  Conclusion – don’t buy the bounce until there is confirmation that the CLI has turned up again – which would probably coincide with a change in tack in Government policy.

Finally, a quick look at the CLI for Australia:

Looks suspiciously like Australia also has “a possible peak in expansion”.

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