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Economy in Brief

OECD LEIS Show Some Mixed Trends
by Robert Brusca  March 12, 2013

The OECD indicators paint a picture of an area that is largely making progress but very slow progress- is it progress that is too slow to be effective? This month China, a country not in the OECD area, is faltering as its indicator is continuing to drop. There is change and there are pressures afoot and it may be a bit soon for the OECD paradigm to capture the pressures.

The readings for EMU show that the index continues to languish below 100 indicating a slowdown but its index reading is making progress: it is up very slightly in the month and has been making regular small steps higher. Of the original 11 Zone members (in the table) only Greece, Ireland, and Spain show values for their respective indicators that are above 100 and no longer signaling a slowdown. Six of the remaining original members have indices below 100, but indices that are improving on the month. Belgium and Denmark are flat month-to-month and post values less than 100. There is no near-term backsliding. But the EMU index is lower on balance over six months and Austria, Belgium and Germany are net lower over six months, too.

If we rank the EMU nations based on their CLI standing (Composite Leading Index-we use the amplitude adjusted readings) compared to historic norms Ireland, Spain, and Greece each with readings of nearly 70% of their historic ranges more are doing the best. That implies that their CLI readings are higher historically than their values in January 2013 only 30% of the time or less. Remember that these indices are statements about momentum not about the level of activity. This result comes about because they have had such weak economies recently but now are improving from some very depressed readings. Germany, France and Austria have readings that place them in the mid- or low- 30th percentiles of their respective ranges (better off about 70% of the time). Italy, which is the newly beleaguered country in the e-Zone has a CLI standing that is in the lower 21% of its historic experience; only Belgium at 19% is worse off than Italy on this momentum metric.

The US, UK and Japan are faring better on this OECD momentum metric. Still there is very little in the way of impressive momentum. The US CLI is stronger only 16% of the time and at the other extreme outside of EMU China's is weaker 28% of the time. That is a disturbingly low reading for such an important economy.

But China may have had way too much attention paid to it. As a country that has run persistent trade surpluses it has been poaching domestic demand from other sources. China's demand has been derived, not originated. China has done well economically when demand in other countries has done well. This has largely not been well-understood as many in markets look at China's activity data each month as though it matters. If China's demand is flattening because US factories - or factories in Vietnam, or someplace else - are prospering, I don't think that is a negative for global growth, but it would be a problem for China. .

Now that China is being weaned off the export-led growth model as a matter of necessity, it is going to have to shift to depend on its own domestic demand for the growth that it can cobble together. While it is still early in the year, and, of course, while China will continue to export, it appears that that the shift-over to have the marginal contribution to growth come from its domestic economy is not going so well, at least to start.

On balance EMU still appears to be struggling although it is mostly making some progress- slow headway. What we have to begin to wonder about is how Italy's transgressive behavior will affect the rest of EMU where countries had toed the painful line of austerity. Will it be 'aufedersane' to austerity? It would appear that the Italian electorate will have no more of it. If so, that will become a bit of a problem for Europe and EMU, not just for Italy. It would appear that the Italian elite have lost control of the people. The notion of imposing another technocrat government to kick the austerity can down the road appears to have died on the vine. Since one major theme is Europe is control by the elite, to move the Zone along to a better place because the 'elite' 'get it' and the people do not is a model that is going to come under increasing pressure, and likely ultimately destructive pressure.

In German Weidmann is saying that the euro-crisis is not over and that some countries should prepare for life outside the currency union.

You don't need to follow events in Europe very closely to know that there is a great deal of popular resentment against the e-Zone for the hardships it is now forcing on many of its members. Even Germany which seems to make out like a bandit in the euro-scheme is under pressure from a public that fears that the costs of the keeping the Zone together will fall on Germany's ample door step.

According to the OECD indicators this process of discord has not really slowed or backtracked growth yet. But we should be observant of economic trends and wary that set-backs could begin to appear and if they come with countries repudiating austerity it will put the ECB's role into question since its special mixture of euro-glue is of a conditional nature requiring that nations that get its support to swallow the austerity pill on a regular basis.

Italy has turned Europe upside down. That would be ironic because it was the Treaty of Rome which established the European Economic Community. That treaty was the launching point for all this back in 1957 - about 55 years ago. Over the years the 'treaty' has been transformed and the customs union renamed and a currency union formed. Of the original members Belgium, France, Italy, Luxembourg, The Netherlands and (West) Germany, two members Italy and France, are having a hard time keeping up with the rest of the union in its modern, enhanced incarnation, not to mention the many other stragglers.

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