OECD leading indicator signals pickup in global economic growth

The world economic engine is expected to stay on course for a pickup in growth this year with surprisingly India being the only exception showing an impending slowdown in growth, data from the Organization for Economic Cooperation and Development (OECD) leading indicators released on Wednesday last week showed.

The report from the OECD was consistent with expectations from other international economic agencies such as the World Bank which, just a day before forecast the global economy growth to rise to 2.7% from last year's 2.3% which marked a post-crisis low.

The OECD's leading indicators are forward looking indicators aimed to provide early signals of potential turning points between economic expansion and contraction among the 34-member nations. The indicators are based on a variety of data points which have a history of showing anticipated swings in the economic activity. Typically, changes signaled by the indicators usually follow a lag of 6 - 9 months after initial indicators. The Paris-based agency measures different gauges of future activity showing signs of a firm pickup in growth in the U.S. and other developed economies including China and Brazil.

The shift in the pace of growth comes after the leading indicators pointed to a slowdown as early as May last year before indicating a period of stabilization. The latest figures indicate a second straight month of positive growth. The OECD's composite leading indicator (CLI) for the 34-nations showed a print of 99.8 in November. A reading below 100 points to slower than normal pace of growth.

OECD Composite Leading Indicator (Nov 2016): 99.8 (Source: OECD)

The uptick was seen coming broadly with changes in asset prices since Trump's election victory in November. Investors are betting on U.S. growth and an increase in inflation in response to the election promises on boosting infrastructure and cutting taxes. Still, despite these expectations, the OECD's indicators were already hinting that the U.S. economy was on an upward track even before the elections. The data suggested that the U.S. economy was at a bigger risk of showing signs of overheating if the new Trump administration introduced too much stimulus.

Last week, in his first press conference after winning the elections in November, the President-Elect Trump disappointed investors by failing to make any references to the fiscal spending plans, which has been a major source in the speculative rally in the U.S. dollar which also sent bond yields rising. The dollar pared gains after Trump failed to give any insights and maintained his speech on taxing companies that moved jobs overseas and naming, China, Japan, Russia, and Mexico as countries with which the U.S. had a trade imbalance.

In the Euro area, growth is expected to come from France, Germany, and Italy, while China, Brazil, and Russia economies are expected to gain momentum over the coming months. According to the CLI data, there are tentative signs of growth gaining momentum in the UK despite the impending Brexit, although the OECD notes that the momentum in growth was below trend and would likely remain so until the uncertainty on the Brexit terms is clearer.

The U.S. economy is expected to show an acceleration from the second half of this year if the new administration follows through on its election promises. The prospects on the pickup in growth are expected to keep the Fed on a rate hike tightening cycle.

Inflation is also set to accelerate in the U.S, the euro area and the UK making monetary policy less accommodating as a result. Analysts are of the view that besides the U.S. Federal Reserve, the Bank of England is also likely to stop its Quantitative Easing or Asset Purchase Program as a first step towards containing inflation close to its 2% target rate.

The first set of GDP reports will be coming starting this week with China reporting GDP figures on Friday while the US and the UK will be reporting the preliminary GDP figures for December towards the end of this month.