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Economy in Brief

OECD LEIs Show Very Similar Rates of Expansion
by Robert Brusca  July 12, 2021

The OECD area shows increases in June for the leading economic indicators, for the OECD7 and for all the countries in the table – no exceptions. The red numbers in the table flag OECD readings for the LEIs that are below 100. Such index weakness suggests weaker than normal growth. France, Greece, and Spain have issued those readings for some time. The United Kingdom stopped its own string of softer-than-trend signals this month. The EMU as a unit stopped those signals in April.

The OECD prefers to vet its signals over a six-month period. The graph plots six-month percentage changes for the United States, Japan, the OECD total, and the euro area. The performance shows a clustering of similar signals with Japan tending to the weaker end of the spectrum and with less volatility overall.

In the table, all developed countries plus China show a ratio of the June LEI to six months ago (December) that is higher on balance (ratio values above 100). The same calculation is repeated for the previous six months (December 2020 to six months ago) and that has the same result. These ratios establish that the pro-growth signal has been in play for at least 12 months across the board for the OECD and several select OECD-groups and countries as well as for China. However, only China shows a step up in the ratio over the most recent six months compared to the previous six-month performance.

As a separate assessment all LEI levels are ranked on data back to 1997. Only France, Greece, and China have rankings in the top ten percentile of their respective historic queues of data. Interestingly, France and Greece still have readings that are showing subpar growth. This combination of signals underscores that France and Greece have been through an unusual period of structurally weak growth and now are breaking out of it but still score as weaker than normal responses in the OECD framework. While Spain shows some solid momentum, its growth is below trend and its ranking of the LEI is the weakest by far among developed economies in its 26.4 percentile.

Despite some gargantuan GDP growth in the U.S. and some rocking consumer spending fueled by enormous government transfer payments, the OECD LEIs do not paint a rollicking picture for the U.S. economy. Job growth has lagged spending growth. The unemployment rate is elevated and a lot of businesses have closed their doors for good. The OECD LEIs give a solid scoring to the U.S. expansion but do not seem to reflect the outsized gains in spending. That is a testament to breadth of the OECD’s LEI measures.

On balance, the OECD-area shows no signs of overheating. The highest percentile standings are among countries rising from the ashes of their own previous weakness! The average and median percentile rankings among the OECD members and groups in the table show an average of 71.8% and a median of 77.1%. Those are solid readings but nothing more.

Table 1: Developed Countries

Developing economies
Among developing economics (we repeat China in this table), all but Brazil show month-to-month improvements. And while some countries have been stagnant month-to-month over the past three months, Brazil is the only country to see a weaker LEI signal over these months. And Brazil, in fact, has seen a weaker signal in each of these three months.

Sequential growth rates find the developing economics growing over three months six months and 12 months except Brazil that runs flat over six months and shows a net decline over three months. The index levels show below normal (below 100 readings) in six countries: Indonesia, Slovakia, Hungary, the Czech Republic, Russia, and India.

However, on the matter of growth all of these developing economies at least round up to a ratio of unity when the current LEI is compared to the level of six-months ago. This is the OECD’s preferred time horizon to assess growth. Most pass this growth test with flying colors. Brazil rounds up to unity and Turkey is higher by just 0.2%. Only Chile, the Czech Republic and Hungary are up over six months by less than 1%.

The percentile standings, however, show a great deal more unevenness than for the developed countries. Here when we compare the LEI values to historic norms we see the shortfalls. In terms of the other metrics, monthly changes and momentum, the developing countries are moving ahead nicely- momentum is their friend. But it is in terms of where they are compared to where they must go to attain trend or normalcy that they lag badly. Seven countries have queue standings below their median values. Indonesia’s queue standing is at its 5.6 percentile mark; Slovakia’s is at 7.5%. Hungary is in its lower 10 percentile; India is at a 12.7 percentile standing. The Czech Republic has a 16 percentile standing while Slovenia has a 38.4 percentile standing. All of these are well below their respective medians. In all cases, the median lies at a 50 percentile standing. Only China and Chile have top ten percentile standings with Brazil surprisingly close at an 89.6 percentile standing despite its recent string of weaknesses. The average percentile standing for the table is 49.1 percentile compared to the median which is a very similar 49.3 percentile although only seven of fourteen countries have readings below 50 and they are weak enough to the pull the average reading and the median reading below 50.

Table 2: Developing Countries

Summing up
The virus continues to spread. The delta variant which spreads even faster is also on the loose and taking over globally. Although it is a more infectious virus, it does not seem to be as lethal as earlier versions. U.K. data show that hospitalizations plummeted when the Delta variant rose from 20% to 90% of infections there. Still, developing countries have a far lower proportion of their populations vaccinated and have inferior medical facilities to treat people that have the worst experiences with the virus.

These are formidable hurdles to go over to get things back on track in those countries. The virus continues to call the tune and to a much greater extent in the developing world. Among developed economies, the virus is being held at bay, but some health officials there are worried about the fall and winter months and the onset of the next flu season.

As for economics…some central banks are flirting with the idea of being less accommodative. The Fed is at least talking about tapering at its meetings and at the ECB Austrian and German representatives are reported to want some of the most stimulative measures pared back. Even so, the ECB modified its only policy objective to say that it now shoots at an average inflation rate of 2% instead of at a rate a little below 2%- the ceiling is gone in the EMU but the sky is not the limit.

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